Do you enjoy a wild ride? (photo credit)
Asset Allocation is a fundamental part of investing. Which investments should we own? What percentage of total investments should we allocate to equities, bonds, Real Estate, or alternatives? As an American, should I purchase International assets, or focus solely on US assets?
There is an incredible amount of research on this topic, considering factors from expected duration of retirement to personal temperament. Perhaps you’ve heard some of the sound bite versions of this research, such as “Hold a percentage of stocks equal to 100 minus your Age.” So if, for example, you were 40 years old, you would hold 60% stock and 40% bonds
Like most mainstream investment advice, it is targeted at people that plan to retire at 65 and live until they are 80. Which is why as an early retiree, this advice (and most mainstream advice) is harmful at best
Tossing conventional wisdom to the side, over the past several years I’ve been moving our asset allocation towards 100% equities. Let’s explore why
Risk
Wait a second?! Isn’t 100% stock super risky? What if the stock market suffers a major drop? What if the Great Recession happens all over again?
I think the phrasing of these questions holds an underlying assumption, that the stock price on any given day is important. Unless you plan to buy or sell, the price is largely irrelevant. I seldom look at the stock market. The last time I did so was to participate in Jim Collins’ annual Market Prediction Contest, a competition I predict I will lose 3 years running
100% guaranteed, over our planned 60+ year retirement the stock market will have many major declines, several of them will be sustained over long periods.
But this does not concern me. Our real risk comes not from changes in share price, but from outliving our portfolio
The Case for 100% Stocks
Asset Allocation and Success Rates
There are several different methods to predict portfolio longevity, or retirement success rates. The two most common methods are probably Monte Carlo analysis and Sequence of Return simulation, both of which can be done with cFIREsim.
For a typical 30 year retirement, we can use cFIREsim to predict portfolio success rate for varying stock/bond allocation
I use all default values (4% withdrawal rate) for “Success Rates with Various Allocations”, with the exception of Fees. For this, I use the Personal Capital Retirement Fee Analyzer which tells me I’m paying 0.08% with current asset allocation. If you don’t know your current investment fees, this tool will figure it out in a few seconds
30 year Retirement Success Rates. Peak Success at 90% equities
Generally speaking, this data suggests any asset allocation from 60-100% equities has about the same chance of success (90%+.) I more or less assume anything above 80% success rate is false confidence. The future will likely have many Black Swans
. You never know if Tyler Durden is going to erase the debt record, Simian flu will wipe out 90% of the human race, or a terrorist will detonate a dirty bomb in downtown Manhattan.
There are fewer 60 year investment returns to explore, but doing so gives a slightly different picture
60 Year Retirement Success Rates. Peak Success at 90% Equities
Again the peak success rate is in the 90% range. The success rate with a high percentage of bonds looks quite dismal.
For completeness, let’s also look at a Monte Carlo projection. This uses statistical models for stock and bond performance, and simulates thousands of retirement periods to come up with a confidence factor. I don’t favor this method, as data for each year is random which ignores correlation between years as well as the fact that mean and standard deviation should change based on economic environment. Also, in the cFIREsim model annual inflation is fixed at 3%, which ignores periods of deflation or high inflation
Because of the random nature of the analysis, the results will never be the same twice. But here are 2 outputs, one for 30 years and another for 60 years
Monte Carlo Analysis Success Rates for 30 Year Retirement
Monte Carlo Analysis Success Rate for 60 Year Retirement
In both cases, holding 70%+ seems to produce success rates in the 90% range
Return vs Volatility
The Efficient Frontier is often used to graphically represent return vs volatility for different asset allocations.
I pulled this analysis from the Personal Capital Investment Checkup tool. Based on our current (not 100% stock) asset allocation, we are looking at a potential average return of 9% with a standard deviation of 14.3%. By moving to 100% stock, we have a potential annual return of 10.1%, but with a substantially greater volatility of 20.2%.
Most people will argue that a small increase in annual return is not worth the vastly increased volatility. This is especially true when the success rate of our portfolio over a 60 year period is roughly the same whether we have 70% equities or 100% equities
So why accept the greater volatility? Because over a 60 year period, even a small increase in return results in massive differences in total assets
Efficient Frontier
Terminal Value
In addition to evaluating success rates, cFIREsim’s Standard Simulation can help us estimate portfolio value statistics
Using default values except for our own fee structure, we get the following results for equity percentages of 70% to 100%. All data is for a 30 year retirement, with two results for a 60 year retirement shown in parenthesis
| % Equities | 70% | 80% | 90% | 100% |
|---|---|---|---|---|
| Success Rate | 94% | 94% | 94% | 94% |
| Ending Value Average | $1.8 | $2.1 | $2.4 | $2.8 |
| Ending Value Median | $1.2 ($3.0) | $1.6 | $1.9 | $2.3 ($12.3) |
| Ending Value Std Deviation | $1.5 | $1.7 | $2.0 | $2.3 |
| Ending Value Highest | $5.6 | $6.4 | $7.2 | $8.8 |
| Ending Value Lowest | -$0.3 | -$0.3 | -$0.3 | -$0.3 |
| Cycles dipped >60% below initial value | 28 of 115 (24%) | 27 of 115 (23%) | 27 of 115 (23%) | 24 of 115 (21%) |
The difference in median value for a 30 year period over the studied range is 2x. Over a 60 year period, it is 4x. And this is without a major difference in success rate, cases with dips of greater than 60% in value, or minimum terminal value
Posterity will benefit tremendously from our tolerance for risk
Arguments Against 100% Stocks
The numbers say 100% stocks is the right way to go. I agree
But what if future market returns are not as strong as the past? And what about emotions? Humans are not logical machines. How many people panicked and sold at the bottom in 2008, losing everything?
There is no one right answer. I am optimistic about future economic performance, and am comfortable with volatility, which is why I can reminisce about the glory days of 2008.
Tolerance to Risk
If somebody is not comfortable seeing the value of their portfolio collapse, having 100% of their investments in stock is not a great idea
We lost 10 years worth of spending in 2008. Some people freaked out. I did too, but for a different reason. I was upset that I didn’t have extra cash to buy more stock. During the downturn, I realized the value of the portfolio didn’t impact our life one little bit. Dividends were still being paid, and our daily lives were exactly the same
In recent times, I’ve watched the value of our portfolio swing by several years worth of spending. Dividends were still being paid, and our lives were exactly the same
If the stock market were to collapse tomorrow, dividends would still continue to be paid and our lives would be exactly the same. And I probably wouldn’t know about it for a few months anyway, since I don’t often look at the market and don’t watch television
Margin of Safety
We also have incredible margins of safety that would prevent us from selling stock in a downturn. In the big picture, most of these would only need to be used in the next 10 years or so. At some point, our portfolio will become too big to fail. cFIREsim already predicts a 100% success rate without future income or Social Security
This is largely because nearly 100% of our over the top luxurious lifestyle is funded by dividends and interest. Dividends can be reduced or eliminated, but we can also reduce our spending (In 2008, VTI/VTSAX dropped the dividend 3%. In 2009, a further 12%. It has more than fully recovered)
In a fixed location, we can reduce spending by eating more tofu and less steak and lobster. Or we can practice geographic arbitrage, eating steak and lobster in Belize or Argentina instead of Paris or Tokyo or Sydney. Being 100% location independent has its privileges
Some would argue that there is no need to continue to seek growth. Perhaps I agree, despite the clear mathematical advantage of 100% Equities. Which is probably why our current asset allocation is only on the path to 100% equities rather than having arrived
The GCC Asset Allocation
Using the Personal Capital Portfolio View, I get the following snapshot of our portfolio
US Stocks is 95% VTI. International Stocks is 100% VEU.
US Bonds are a roughly equal mix of BND / IEI / MUB / TIP
Alternatives is 100% VNQ
Cash is our Capital One 360 Account
Update: our portfolio moved closer to 100% equities in 2016.
What is your Asset Allocation plan? How do you feel about 100% Equities?
Wow.
If you’re thinking about retiring in your 30’s or 40’s and living more than 3 decades, pay attention to this article.
We are also close to 100% equities for the same reasons you mentioned. Very little downside risk in terms of portfolio survivability over 50-60 years (something you should plan on if you retire in your 30’s).
Risk is such an interesting concept that changes depending on your circumstances. I view outliving the portfolio as a huge risk (which you mentioned). I also view suffering a slowly eroding standard of living as you fail to keep up with inflation as another risk. 100% equities mitigates those two risks much better than bonds and offers the long term growth required to actually increase your standard of living over the long term.
We’re spending just about the dividend yield of our portfolio, and view flexibility in how much we spend ($2/lb pork vs lobsters in our case) as an ally if the portfolio drops big time early on in this early retirement marathon.
Risk is indeed quite interesting. People worry about shark attacks, while at the same time sitting on top of a 2000 lb explosive gasoline engine, hurling down the highway at 70+ mph. I’m pretty sure the odds of death are higher with the latter
With a spending profile like yours, you will most likely also end up with a portfolio that is too big to fail. That equity volatility is pretty sweet
Would you please let me know what are those :
VTI,VEU,BND,IEI,MUB,TIP,VNQ ? Thanks.
They are ETFs. You can find them on the Vanguard website
Hello hellow another year is up. Glad to hear you now n then year round. I am think about to have something from vanguard , which one do you like to buy if you are goinf to buy one or two now . Tnks.
We put most of our funds in VTI and VXUS. See this post for our asset allocation (not advice, just sharing what we do.)
We, too, find it interesting to compare people’s risk tolerance. During a recent island tour a couple wouldn’t snorkel because two reef sharks were in the water, ignoring the fact 20 people had been happily swimming for 30 minutes with no injury.
We have been 100% equities since we began to invest in 2011, though making the shift to index funds in that time. Now we are traveling full time from our savings and after six months we have more money than when we started! The market has gone up of course and that may change, but we also know we can adapt like everyone here.
As you’ve found, GCC, the opportunities continue to present themselves if you are willing to take the “risk” of chasing your dreams.
Cheers and happy Saturday!
I’m 53 years old and I’m 100% in stocks and just retired about a year ago. I guess the only difference in my philosophy overs yours is I have cash on hand for about 18 months of expenses. I was considering upping that to 36. I noticed you advice very little cash on hand. So here is my logic, let me know where I’m going wrong. I like having the cash levels because the market valuations are very rich right now, (Buffet is sitting on $100B in cash) and also it could be used for living on without tapping my stocks during the next big correction. Where am I going wrong?
You like vanilla. I like chocolate. Neither is wrong. We can live fairly well on just dividend income, so selling is always optional.
Allocation wise, I would state your position as X% cash / Y% equities.
If you have 18 months of cash, then you are not 100% in equitys, this is a false statement. Your portfolio includes all and everything of value, including property, investments, cash, paintings, cars, life insurance policy. Pension, ROTH IRA. Equitys are where you make the money. T-bills and Bonds are where you store the money. So, you make a million dollars of the Stock market, and then within a 2 month period, you lose $400,000 ? Explain to me how this is good investing? Because that is what can happen if you are truely 100% equitys.
I can’t think of any reason to complain about a 60% gain
I can, 60% gain over a full market cycle, equates to about 4% per annum, my bond fund did 5% last year. But we are not talking about a 60% gain, its a 40% loss over the entire investment life, lets say in my case, I invest for 20 years and build a nest egg of 1 Million Dollars, at 6% per annum, all in a bucket of equitys. A 40% drop in a 2 month period wipes out $400,000 dollars… all of a sudden you 6% growth over 20 years, now looks like 2%, which is below inflation…
but good luck, I hope it works out for you… I don’t have the stomach for it.
cheers
spaceman
Your bond fund is up 5%. My international stock fund is up 35%. You’ve already lost 30%.
What 100% equities really mean?
https://gocurrycracker.com/2016-gcc-asset-allocation/
It means having all your eggs in one basket…
or 4,000 baskets in the case of VTSAX
Excellent summary. We debate this issue endlessly in the MMM forums. My only quibble with your analysis (which I otherwise completely agree with) is that your reliance on continued payment of dividends during downturns is wholly unnecessary; it reflects a mental distinction between “principal” and “interest” that is entirely artificial. Even if every single one of the thousands of companies indirectly held in your diversified portfolio immediately ceased paying dividends in the face of a downturn, you can sell the equivalent amount of your shares and wind up in the same position (your remaining shares will capture the value of those unpaid dividends).
I agree those two transactions should be mathematically equivalent.
But… my mental distinction feels more comfortable keeping the number of shares whole, particularly with severe declines that might temporarily make equity value less than book value
If all dividends did drop to zero, I’d probably be comfortable with the math though
Investing in ETF lowers the risk of all dropping to zero to a minimum. With that many stocks (in the Total Market, for example) the only reason why all dividends would be cut if it is the end of the economy as we know it.
We are using Bernstein’s Simpleton’s Portfolio: 25% of Large US Stocks, 25% Small US Stock, 25% International Stock, 25% Short Term US Bonds, all indexed. So, we’re a ways off from 100% stock, but probably holding less bonds than the traditional advice would have us hold.
Jason Hull has written about the impacts of a much longer retirement (basically, that the 4% rule might be better replaced by a 3% rule).
I do think that holding more stocks is a good approach for a longer retirement. Looking at your FIREsim charts though, it seems 90% might be a sweeter spot than 100…
On the cFIREsim charts, 90% equities does have a higher success rate than 100% equities by a minor amount. We don’t really have that level of precision, and any confidence level above 80% is most likely false
This is why I look at terminal value. Even though both the 90% and 100% case have a similar success rate, the median terminal value for 100% equities is 2x the 90% case after 30 years and 4x after 60 years.
The book, The Intelligent Asset Allocator, explains why a portfolio with just a small amount of an uncorrellated asset class (e.g. 90% equities, 10% bonds) performs better than a 100% equities portfolio. I’d be curious to hear GCC’s opinion of that book.
I don’t know if I’ve read that book (but no matter, the concept is widely known)
It depends on how you define “better.” Usually better is defined as the highest risk adjusted return.
If we redefine better as the highest success rate for a 60 year retirement with a large terminal value, then 100% stock is “better”
Thanks for your reply. You’re correct on my assumed definition of “better”. The outcome of the analysis does depend on that definition.
Excellent post — please keep writing. This is good food for thought.
Reminds me of something Warren Buffet said days ago in his letter to shareholders:
http://www.berkshirehathaway.com/letters/2014ltr.pdf
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for example – whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say, investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds should keep appropriate sums in Treasuries or insured bank deposits.
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less risky than dollar-based securities.
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these investors could have assured themselves of a good income for life by simply buying a very low-cost index fund whose dividends would trend upward over the years and whose principal would grow as well (with many ups and
downs, to be sure).
“Wall Street makes its money on activity. You make your money on inactivity. If everybody in this room trades their portfolio around every day with every other person, you’re all going to end up broke. The intermediary is going to end up with all the money. On the other hand, if you all own stock in a group of average businesses and just sit here for fifty years, you’ll end up with a fair amount of money and your broker will be broke.” – Warren Buffett
I was happy that I finally popped out a long reply, but then I saw yours!
Warren is a far more eloquent writer than I (am)
Thanks for sharing, I always love reading the BRK annual letters
Swinging for the maximum retirement terminal value brings this Warren Buffett quote to mind:
“Never risk what you have and need for what we don’t have and don’t need.”
Can you share a link for that quote? Context is important.
I need a 60+ year retirement
Warren also recommends a 90% stock / 10% bond allocation
http://www.forbes.com/sites/davidwismer/2014/03/02/warren-buffett-investing-advice-for-you-and-my-wife-and-other-quotes-of-the-week/
Jeremy,
The quote can be found on numerous sites on the internet. I really do not know when Buffet first made this statement or the original context. Here is one link:
http://liveyourlegend.net/20-uncommon-career-lessons-from-my-weekend-with-warren-buffett/
The applicability to your scenario would be the need for a 60+ retirement versus the need (desire?) for a maximum terminal value. I guess one way to ask the question is, do you intend to maintain a 100% allocation to equities right down to the day you pass on to the next world?
Thanks for the link Dave, I Googled the quote and couldn’t find it. Probably user error
I assumed he meant it in the sense of don’t invest your emergency fund or don’t use leverage
I think the answer to your question is yes. Just like Buffett
The context for the quote was quite specific but has been isolated as a sound byte.
It was in reference to a wealthy private equity or hedge fund guy/s who had more money than he or his family could spend. The guy/s did an all in bet on their latest opportunity and it blew up on them.
Buffett’s point was they could have sat on their bums and been set for all future generations, but instead they gambled everything and could never have spent that money even if they had of won! Instead they lost what they needed for the cushy life they had, and it was not necessary at all!
I tried finding the original story but all of the top quote articles about Buffett drown everything else out!
I recently started reading your blog and have been enjoying it.
All the best! :)
Thanks! This version of the story completely makes sense
And Dividend Mantra does a solid expounding on this:
“This is really great stuff here.
For whatever reason, that volatility is often synonymous with risk for most people. I’ve never viewed it that way. Volatility has never been a proxy for risk, in my view. I’ve never looked at a stock with a low beta (a measure of a stock’s volatility against the broader market) and thought to myself: “Yes, this stock isn’t volatile! It must also be low in risk”. If anything, I bemoan the lack of volatility. As I’ve often said, I view volatility as synonymous with opportunity.
Risk can be difficult to quantify. But when looking at stocks, volatility is about the last place I look to in terms of assessing risk. Fundamentals, competitive advantages, market share, debt, size, regulation, and competitive environments tell me a lot more about risk than volatility does. That’s for certain.
When I think of risk, I think of permanent loss of capital. Risk, to me, is the odds of losing money. That’s risk. When I look at an investment’s prospects, I immediately think of the odds that I’ll somehow permanently lose money (factoring in inflation as well). And that goes not just for ending with less money than I started with, but also opportunity costs.
If I could invest in Opportunity X, but Opportunity Y will provide far more returns over the long haul (even if the ride is bumpier), then Opportunity X is technically more risky because I’ll technically be losing money. Thus, cash is risky to me. Putting cash under the mattress is an incredibly risky way to handle your wealth because you’re absolutely guaranteed to lose money over time due to the ravages of inflation. The opportunity costs of cash in comparison to high-quality stocks is enormous. Complacency is expensive.”
Warren’s advise makes wonderful sense when you are billionaire or multi-millionaire, but for someone with less than a million dollars and in retirement, the risk is too great–I think–to have only 10% in bonds.
The main point of the article is that 90-100% in stocks is the LEAST risky way to invest for your retirement. What % would you put in bonds that has a higher chance of success? Look at the numbers. If you did not sufficiently fund your retirement to get a 3-4% withdrawal rate, you will need to be flexible on your spending, but increasing your % in bonds will only make it worse, not better.
If you use a target date fund, in order to closely get the high percentage of stocks I assume you would pick a fund with a date in the far future, like 2075 fund or something like that?
That would probably work
Well thought out write-up. I’m also 100% equity at the moment. Looking to add some real estate to act as my fixed income.
You’re looking to buy a property? Or would you use REITs?
Thanks for writing this article, it really firmed up some ideas that I only partly understood.
I have one question regarding dividends. You mention that in downturns the dividends continue to be paid. As I understand it, dividends are listed as a percentage yield. Is this a percentage of the share price of the mutual fund or stock? And if so, wouldn’t this mean that if a portfolio dropped by 50% in a downturn, the dividends paid would drop by 50% as well?
Meaning, if you have a 2% dividend in a stock that’s trading for $100 per share, then that stock drops to $50 per share, wouldn’t your dividend drop from $2 to $1?
Companies pay dividends as a fixed dollar amount, $x/share.
You will often see them as a percentage, but that is just for convenience.
If a company says today they will pay $1/share next quarter, no matter what the price change in the stock they will still pay $1/share
It appears with this post that 100% equities is your answer for a desire for maximum yield. While I recognize the desire and benefit of maximum yield, 100% equities is not the answer. The opportunity for improvement comes from the common misconception of the efficient frontier. You posted a screenshot of Personal Capitals’s Efficient Frontier, this hyperbola is not the efficient frontier. This is going to get a bit theoretical and very difficult to explain in text, but I am willing to try and this image (http://en.wikipedia.org/wiki/Modern_portfolio_theory#mediaviewer/File:Markowitz_frontier.jpg) will help. The efficient frontier is actually a line. A line that runs through two points. One point, called the risk-free rate, has 0 risk, but a base level of return. In common practice, this is the 30-yr treasury yield, currently at ~2.8%. The second point on the efficient frontier line is the tangent point of the hyperbola displayed at Personal Capital – this makes more sense if you view the link. The line in-between these two points is easy to comprehend, depending on how much Tangency Portfolio and Risk-Free Rate you have, how can define your risk and return. Where this gets interesting (and theory falls a bit short of reality) is to the right of the Tangency portfolio. If you can borrow at the risk-free rate, you can continue to move up the efficient frontier line and receive much greater returns at the same risk level as the hyperbola. So for example, if you borrowed 50% of your portfolio value at the risk-free rate and invested all that money (150%) in the Tangency Portfolio, your risk/return would be much better than what is confined with the hyperbola.
The first question of this is where can I borrow money at the risk-free rate? This is where the conversation gets interesting and practice/theory diverge. I personally borrow money at the following rates and have no desire to pay them back, my student loan is at 2.8%, my house is at 3.375%, and my rental is at 2.75%. It is possible to borrow money near the risk free rate. So Go Curry Cracker, if you want the highest possible returns with the same risk, borrow money as close to the risk-free rate, invest in the tangency portfolio (probably 85/15 stock/bond – you can calculate this) with your current money and borrowed money.
Two important notes. If you can’t borrow money at the risk-free rate that is ok. All that means is the line to the right of tangency portfolio is “flatter” than theory. The line would look “kinked” at the tangency portfolio point, but likely still better than what is within the hyperbola. Finally, it is important to recognize that all of these calculations are dynamic and changing by the minute. The risk-free rate changes daily. Correlations, risk, and return for asset classes constantly changes. The static hyperbola that Personal Capital shows is useful, but it is a good estimate at best for what is actually going on.
I’m not interested in maximum yield, I’m interested in maximum success rate for a 60+ year retirement and maximum terminal value
Using past performance to predict future performance is always going to be an oversimplification
You use the FIRE sim to explain your point, but isn’t that using exclusively data from past performance?
Yes. That’s all we have.
The only conclusion here is “this is what worked in the past.”
I’m learning here. I thought maximum yield is why you would have maximum success rate. I’m a little confused. Do you mind clarifying some? It’s greatly appreciated.
Laura: good on you! No, maximum yield does not yield the maximum success rate. If the risk (volatility) is very high, and you have to withdraw at the wrong time, you may deplete (or hurt, anyway) your portfolio before it had a chance to realize those high returns. Look up the ‘sequence of returns’.
What @TheBisutti quite accurately says above is that GCC could realize a higher return (or, equivalently, lower risk) without going 100% equities but by borrowing at the risk-free rate instead. At least in theory…
Ha, I now take notes while I am reading your post. Too many points popped up in my mind while I am reading. Thank you for sharing!
Below are my notes for this post:
1. 0.08%: pretty low expense ratio. Low-cost Vanguard index funds are the way to go.
2. Comparing to the 4% rule, I agree that the asset allocation decision is a much more challenging one as it involves personal preferences and behavior biases. Implementing and maintaining an asset allocation is very difficult and time consuming too. 100% equity solves the problem and saves the trouble of maintaining an asset allocation. Anything that saves time is valuable. Of course, you lucky early retirees have the luxury to spend more time on personal finance if you want. This is a bit ironic. You guys are the group that should worry the least about personal finance, but yet you guys are the group that are the best at this. I guess it is an endogenous process. Because you are good at this, you were able to achieve financial independence. Because you achieved financial independence, you are able to do an even better job because you have the freedom to dig the information whenever you want.
3. Margin of safety: For those that are still saving toward FI, another margin of safety is saving a bit more than needed. For example, assuming $40,000 is needed after retirement. The 4% rule says $1m is enough. However, if $1.2m is saved instead, the cfiresim predicts a more than 95% success rate with less than 30% (60%) of equity allocation for a 30 (60) year retirement. However, I understand that some people may not want to work the additional one or two years to achieve the additional buffer.
4. Over a long period, a 1% difference in return makes a huge difference in portfolio values. I just did a post that compares the investment values of funds with different expense ratios. In 40 years, a 1% difference in annual fees makes a >30% difference in portfolios’ ending values.
5. We currently maintain a 90% equity and 10% fixed income asset allocation. The 10% is invested in Tiaa-Cref’s traditional annuity that guarantees a 3% return. I would rather have 8% from equity markets instead, but I can settle on the 3% to put at peace the part of brain that is in charge of risk-aversion. I rebalance my portfolio once a year. Once a year is still some work. I may go for 100% equity just for the simplicity. :)
In terms of comment length, I finally have one that I am proud of. :)
This one is definitely something to be proud of :)
If I didn’t study engineering, I probably would have studied finance. So I’m guilty of being a personal finance nut
I was one of those people that worked too long, probably by 3 years. It does help with margin of safety though
I have to look at the market once a year also, to harvest capital gains / losses and to do a Roth IRA Conversion. Once per year is not bad at all
“But what if future market returns are not as strong as the past? And what about emotions?”
Years ago I read William O’Neil’s classic “How to Make Money in Stocks.” In this book O’Neil advocates for concentrated, aggressive growth investing and describes methods for recognizing technical patterns in charts of stocks that might be about to “take off.” He also provides some insight about how the stock market works, and riding the coattails of the institutional investors who have the cash to make prices soar for particular stocks.
I mention this because the book’s first chapter contains full-page charts for about 100 companies in various historical timeframes. Several of these charts go all the way back to the mid-1800s, I believe one of the charts is for the first US stock ever! When I saw these, my first reaction was why is he bothering to show us charts this old and sometimes for companies that no longer exist. A lot has changed since the 1800s but people’s buying and selling and reactions to sharp market movements has not changed.
That took care of any concerns I had about history and emotions.
Jeremy, I think I learned about cFIREsim a year or so ago from you. Using it has brought me peace of mind. Keep up the good work!
cFIREsim is great, I still use it all the time.
The other side of people’s buying and selling and reactions to sharp market movements not changing, is everybody thinks they will be able to handle a major market collapse and remain calm. I’m hoping on this one thing at least I am right :)
I’ve stuck with 90/10 for a while but I think I’ve seen sufficient evidence that 100/0 is the better way to go. Point noted, allocation changed.
Thanks for another informative post.
I think that is the way to go. I still have to man up and pull the trigger myself
Out of curiosity, what is your allocation? I’m currently 86/14 (110 – age in stocks) but I’m thinking I’ll switch to 100/0 if I can stick to my guns through the next market crash (which will also be my first while having skin in the game).
The last part of this post shows our current allocation
Not that it’s a recommendation either way, but have you ever considered peer lending as an alternative income investment?
When the markets took a dive, my peer lending investments continued performing. The flip side of that is when the markets made a steep climb, my peer lending investments didn’t perform any better.
I’m curious what a financially independent person thinks of peer lending. It seems like it would be a likely candidate to provide a recurring income.
I haven’t
The bigger peer lending platforms offer affiliate relationships, so a lot of bloggers talk about this quite a bit. I don’t really want to lend money to people to buy engagement rings or pay off their credit cards, or put in the time to find the entrepreneurs
In the long term, business ownership is always a better investment than debt.
I personally think that spending too much time trying to perfect asset allocation is really an academic exercise.
Yes, there is something to be said about holding non-correlated assets, but as we saw in the Great Recession, the correlation of all assets goes to one in times of crisis.
I have no problem holding 100% equities and if I had to choose a single asset class to be invested in, it would likely be equities due to liquidity alone.
I think any asset allocation methodology over a long enough duration will work out in the long run. Assuming you have some margins of safety built in to get you through the inevitable dips that happen.
You just have to find the one that works for your individual wants and needs.
Interesting post.
Thanks for sharing. I always love a post that goes against conventional wisdom. Its always to see other perspectives, as there are many different ways to arrive at the same end game.
Your bond portfolio is your own home, and any rental property you may own. It makes sense to have the majority of your investments in a 401K in equities. Mainly a S&P fund.
All the Bogleheads would agree. When you have a 60-year timeframe, that’s a long time. It’s like 1955 until now.
We don’t own a home or rental property
I have 40% of my net worth in home equity so I like the idea of substituting this for bond allocation. This sets me up to contribute to stocks only for the next ~8 years before I ultimately retire, vacate the kids, and downsize the house. I can use the excess cash as a bridge to a traditional retirement age and/or towards purchase of rental property.
Great article and nice usage of graphs to demonstrate your point. We’re at 100% equities as well… Ok maybe 99% as I have one or two bond funds in my work’s RRSP account. I have the same view as you, we have a long time to invest so we can ride out the market volatility. We are not investing for the short term but rather the long term. Over the long term, stock markets return about 6-7% on average. I think that’s pretty good.
Most of our holdings are individual dividend paying stocks. We also hold some growth stocks as well. I’m also starting to invest in index funds as a way to build a hybrid dividend/ETF portfolio. The plan is to be in equities 100% for a while.
Hi Tawcan, sounds like a solid plan. Long term equities are definitely the strong play
I think much more important than your exact allocation is the point about being flexible with spending, especially early in retirement.
I am also optimistic about the long term. However, I am cautious about overestimating return in the early years of our retirement b/c of the current high market valuations which traditionally correlate with lower returns over the ensuing decade. Using valuations you can have a decent idea what will happen in the next decade and the early years of retirement are the most important when determining if your money will last. Based on the current valuations, I think you’re better to estimate these early returns on the low side and be happy if you’re wrong rather than overestimate them and be screwed.
Our portfolio is very similar to yours, but we hold a total of 20% (5% cash and 15% short-term bonds) knowing that this will drag our returns when times are good (especially with horrible current interest rates), but allow us to have resources on hand to buy in more stock when the next 2008 rolls around.
The early years are key, which is one of the reasons why we started traveling in Mexico rather than Western Europe (The Euro is looking nice now though, isn’t it?)
Most of the studies I have read show holding cash for the purpose of buying in a future down market almost never make up for the lost opportunity during the good times. With the stock market up 3x since 2008, the drop would have to be incredibly severe
In hindsight, I should have executed my 100% equity plan 2 years ago when I first started really thinking about it. Oops
If you don’t mind sharing, do you/will you keep no cash whatsoever (i.e. do you keep a cash stash that you consider separate from your portfolio)?
I would agree that during accumulation when you are adding money regularly that holding significant amounts of bonds or cash is most of the time a big opportunity cost. However, 100% equities when living off a portfolio seems risky when you would have to sell off a substantial portion of assets in a big market drop. We do live a more conventional lifestyle with a house, cars, etc and so not as flexible w/ spending as you. We figure that we would sleep better at night knowing that having 5% cash could support us for 1+ year at our current lifestyle and 2 years with cutting back, while we could rebalance out of the bonds to recover faster. Different strokes for different folks, but I would choose peace of mind even if not statistically optimal.
Greatly appreciate your insights and analysis as you’re actually living it as we’re still putting the finishing touches on our plans while playing armchair quarterback.
Cheers!
I talked a little bit about our cash management here:
https://gocurrycracker.com/cash-flow-management-early-retirement/
I don’t see much value in keeping more cash than we need to smooth out the cash flow. Cash loses in all economic environments except deflationary periods, but our government has shown they have no reservations in turning on the printing press to prevent it
But the sleep better at night factor is an important one. That is largely what the bonds are for
“Cash loses in all economic environments except deflationary periods”
Cash would also win in bear markets.
Inflation will still erode the purchasing power of cash in a bear market
It doesn’t win unless you convert it to something else, such as buying stock after the down turn.
But studies show that this seldom wins. Over the past 2 years, inflation is up 2% and the market up 40%. The market would need to correct by at least 42% (maybe 46% with dividends) to just break even
Buying in a down market probably doesn’t make up for all lost opportunity in good times but for me at the age of 45 it’s more important to protect the nearly 1 million in gains I have made in the last 4 years than the extra % I can make being 100% in stocks. I used margin heavily from 2009-2013 and I don’t want to do this again even if market crash so that’s why I’m 80/20 right now. I still run my business but when I do decide to sell and retire, i plan on having the 4% withdrawal of my portfolio in stocks and the remaining in fixed income [Ex. If i want 60k salary and I have 2 million portfolio, 1.5 million will be in stocks and the remaining 500k in fixed income]. For me this will achieve two things, reduce volatility and have fixed income for spending or investing in down markets. Even though I know that market will be higher longer terms, I just don’t want to lose that 1 million in gain by taking unnecessary risk.
Now if I could only have the courage and pull the plug on work and sell my business. I already have enough money saved up, but I fear I might regret selling my business and be bored while all my friends and family members are still working. Plus as I don’t have to save for retirement no more, my business gives me lots of money to do pretty much anything money wise but not necessarily time wise. On the other hand I could do without the stress associated with running the business. Also a part of me fears that the market could crash as I retire and take away some of the financial stability I enjoy now.
I admire people that can leave a high paying job to follow their dreams. It’s funny that despite all this money that I just find other stuff to worry about. Did you ever questioned your decision to retire early. My wife says I might have a depression not working despite the facts that I seem to cut my days shorter at work and I’d rather be at home working out, outside doing activities rather than trying to find ways to improve my business. Retiring early makes me feel like I am taking the easy way out. I feel the portfolio I have built is part of the reason I can’t motivate myself at work as I already have enough money to last my lifetime. Can anyone relate to any of this. Any advise or suggestions would be greatly appreciated.
I questioned the decision to retire early a lot. That’s probably why I worked 3 years too long, although that provided an additional margin of safety. In the early retirement community, this is sometimes called “One More Year Syndrome”
I think it is important to move towards something you want, as opposed to away from something you don’t want. We moved towards travel and starting a family, as opposed to away from the stress of a job
Personally, I never identified with my job and had a ton of outside interests. I hear about people that feel bored after leaving work, but I really can’t relate. Perhaps this is a combination of years of not exercising the creative parts of the brain, and so without the direction of a work environment people feel lost. After 2.5 years, I haven’t felt bored for a single day, and really have no idea how I ever found time to go to work
As for taking the easy way out, there is no right or wrong way to live, easy and hard are subjective, and there is no competition for retiring “early” or “late” relative to anybody else. The only thing that matters is, “what would maximize Ron’s happiness?”
Thanks a lot for taking the time to respond to my comment. I am am happy to have discovered this blog. You are a wise person for your young age. I appreciate the comment to move toward something you want rather than away from something you don’t want; this will have me doing a little more thinking.
I have been thinking of hiring someone to manage my business while I take a year off and if I regret my decision, I can always go back and if I don’t well I can permanently retire. I will keep you up to date and I will be following your blog from now on.
Thanks…
I love this article. We are about 95% equities, but the only reason we aren’t 100% is because I have Fidelity Balanced as part of my portfolio. While I primarily focus the rest on Growth or Index funds I keep Fidelity Balanced as a way to have a little bit of bonds and I love balanced funds for investments down the future.
Occasionally, someone comes along and has something to say that changes the way I think about investing. A while back, Jim Collins had that effect on me and, after much research, led me to consolidate multiple stock funds into VTSAX.
While I own a small portion of my portfolio in VBTLX (about 15%), I have been uncomfortable with that holding and view it as a long-term drag on the overall portfolio. Still, I have kept it in place due to the research which seems to suggest I should hold my nose and just swallow the medicine.
Although I am not yet convinced I should abandon bonds, you have certainly caused me give this some additional thought. After some additional research, perhaps you will have changed my stance on the subject.
Well done and thanks for your contributions to the world of early retirement.
Thanks Prob8!!!!
Please let us know what you decide to do after doing your own research. It will be interesting to compare notes
Haha oops. Missed that.
We’re at 90% equities and a big part of the reason is that interest rates have nowhere to go but up, so why would I buy more bonds right now? Standard wisdom is to not time the market and to diversify across asset classes. Fair enough, but isn’t another principle to “avoid losing money”, such as buying (more) bonds seemingly guarantees when interest rates are at historic lows?
So, I find I’m sleeping well enough with half the portfolio in VTSAX and half in Vanguard Life Strategy Growth, which gives us some exposure to international stocks and, yes, limited bonds and all at low fees. Your great analysis above was encouraging that my desire to avoid bonds might also somewhat accidentally be an optimal equities allocation for the very long haul.
I share your thoughts on the current state of bonds. Real interest rates are still negative, not a promising environment for short term bond values
What is your take on the Vanguard Life Strategy Growth? I’m maxing out all retirement accts, emergency fund is set and need to invest cash somewhere now. I invested 7K in the fund recently but now not sure if I should keep investing or find something else.
If you want to hold 20% bonds that fund will do it for you.
I know the early years of an early retirement are critical. I’m having difficulty trying to figure out if I would be better off taking the 65% of my pension, no COLA, ($1100) at 55 or waiting until age 60 to get 100% ($1600). I intend to claim my SS at age 62 because I will still have children under 18 and they will also qualify for a check.
Between 55 and 60-62 I could just spend down my cash or turn off the dividend reinvestment and take the money. Big decisions! Its all part of the reducing the fear of retirement for me.
This is a fairly complex decision. It partially depends on life expectancy, planned budget, and how much non-pension savings you have
On the MMM forums, there is a case study section where a handful of knowledgeable people could weigh in and help with the decision.
http://forum.mrmoneymustache.com/
“I intend to claim my SS at age 62 because I will still have children under 18 and they will also qualify for a check.”
Is this true, Jeremy? How does it work? I always thought that underage kids would only get a check from SS if one of the parents was dead…
I don’t know. I haven’t researched SS in depth
What made 2008 market crash come back to life? Economy is still barely standing on the back of the Fed. Worst part of everything is that Fed is finally run out of the bullet unless there is an another 2008 like a crash. I was asking myself everyday prior to the 2008 crash “How this economic prosperity is possible when thousands of jobs going overseas everyday?”. This is how I dodged the bullet. It didn’t take Einstein’s brain just my common sense US is a big country that takes long time to show a dent A big conglomerates are still cutting thousands of jobs, it will only get worse going forward. Just look at Euro verses Dollar, even almighty Fed can’t stop the bleeding. Janet yellen is under tremendous pressure to raise rate, just imagine that to happen. This will be a savvy and intelligent investors’ market for a while. You should invest at your own risk.
One should always invest at their own risk
I’m much more optimistic about the future
Thanks Jeremy, you’ve reaffirmed the strategy and feeling I’ve had for quite a while. I’ve always felt that bond investing created drag on our portfolio from what little I’ve tried in the past. It never made much sense to me to put considerable money in bond funds waiting for that rainy day so it might buffer the overall portfolio. Meanwhile, losing the better return if the money had been in all equities all along. I’ve been happy with this approach so far.
It also helps that your hair doesn’t catch fire if the market goes south for a period of time. Stay the course. Meanwhile, buying opportunities abound in down markets. If only we had had more free cash in 2008! Unfortunately, folks tend to get nervous in down markets and end up selling low and buy high.
You also have pension and SS income that are guaranteed. The government is taking the volatility and longevity risk for you
You could really consider those to be your fixed income portion of the portfolio
I really don’t feel I need any bonds because I look at my pension and social security as annuity/bond equivalents. In retirement I believe its all about cash flow. I have and average yield of over 3% just in dividends alone and I’m hoping to be able to live off dividends alone if necessary. – The best laid schemes of mice and men!
I think you are thinking about SS the right way. With SS (or a pension) somebody else takes the risk, and income is guaranteed.
I don’t have a concern about living only off of cash flow. We will sell stock at times. It is primarily in our early years that I want to live on cash flow, to allow the portfolio to become too big to fail.
Maintaining a 100% allocation to equities from a statistical standpoint may result in the best SWR and highest terminal balance. However, on an individual basis the sleep at night allocation will be the most successful. Bailing out on a plan in a panic will surely result in a failed outcome. So yes, no one wants to hear it, but if your sleep at night allocation is a low percentage, then you are going to have to work longer, safe more and/or spend less.So in the end personal psychology cannot be ignored as a major factor in success when determining asset allocation.
Rick Ferri recently posted in his blog that a 30% allocation to equities is the starting “center of gravity” for a person in.
http://www.rickferri.com/blog/investments/the-center-of-gravity-for-retirees/
I agree, bailing on a plan in a panic would most likely result in failure.
But so would following Rick Ferri’s advice. I admire Rick Ferri, he has done good stuff. But following his advice would be like going to see a gynecologist to check out my prostate. Rick Ferri is an expert, just the wrong one. Our retirement will (hopefully) be longer than the current age of his target audience. Mr Ferri, why would you recommend an asset allocation that historically had a 1 in 5 chance of success? (Or 100% guaranteed failure in the 60 year Monte Carlo analysis above)
Since publishing this post, I’ve received a surprising number of messages to the effect of: “Don’t go 100% stock! You are guaranteed to panic and lose everything!”
I suppose that is a little bit like announcing you are going to get married, and instead of saying, “Congratulations!”, they said, “Dude, you are guaranteed to cheat on her and get a divorce. Don’t do it.”
Yes, if generally speaking somebody has a habit of cheating, maybe they should reconsider getting married. There is a good chance things won’t work out
But in both cases, action is 100% in my control. Keep your pants on and don’t sell. Those are two commitments I can firmly commit to (see margin of safety section above)
But this is just me. People cheat and panic all the time. Or do they? I know this stuff gets good press (fear sells better than data), but statistically what percentage of people sold stock in 2008 and didn’t recover? I haven’t seen a good analysis
I know in my youth, I would get worried about “losing” $500 in the stock market. $500 was a lot of money then. But after some time, that felt normal. Then I would be concerned about $10k swings. But that too started to feel normal. Now the portfolio will swing in value by $100k or more, and it doesn’t phase me at all. It’s like watching old episodes of Seinfeld. They just aren’t interesting the second time around
Following Rick Ferri’s advice would be highly risky. A lot of people retiring in their 30’s, 40’s, and even 50’s would almost be guaranteed to outlive their portfolio. Instead of sleeping well during the next 20 years and having to take a job at Wal-Mart at Age 60, instead use those experiences as exposure therapy and the insomnia as an opportunity to increase knowledge about fear and investing. In other words, don’t accept a current dangerous state of mind to control investment decisions. Change psychology to be long term beneficial
2 great starting points:
Jim Collins post, There is a major market crash coming!
Douglas Adams’ classic, The Hitchhiker’s Guide to the Galaxy, which offers the sage advice: Don’t Panic!
Jeremy,
Yes Rick’s target audience is probably not the super early retirement types in their 30s and 40s. He is just saying the 30% equity allocation is where the discussion should start. It could be higher or it could be lower. He is just approaching it from the personal sleep at night factor. You can have very successful retirement outcomes with a 30% equity allocation. The SWR is just going to be a lower percent and thus you are going to save more or reduce expenses. In the case of the former that probably means deferring the start of retirement. Maybe it is a black swan event, but how many people will stay the course if they had 100% equity allocation in retirement and the market dropped 90% like it did after the 1929 crash? Not to mention maintaining the same withdraw rate in dollars.
Lower your withdrawal rate enough, and you can have a 100% success rate with 100% bonds. All it takes is working a lot longer
I have the same question. How many people will stay the course? It would be interesting to look at some data.
In the grand scheme of things, 1929 wasn’t a bad time to retire (the worst time would have been 1965/1966.) At 4% withdrawal, even with 100% stock, you had 25 years of good living before the portfolio failed, plenty of time to make adjustments. Or take your advice of a lower withdrawal rate (3%?), and even 60 years later the portfolio is 3x the 1929 pre-crash starting value (inflation adjusted) (all date from cFIREsim)
Too bad cFIREsim did not exist in 1929. Then maybe all those guys who jumped out of windows after the crash would have SWR calculation and happily retired instead. Tongue in cheek…the jumping out window stories are just urban legend.
I feel the same about my portfolio swings where losing 100k doesn’t change much in my life; but losing 100k when the market is barely correcting and moving right back up in a matter of a few months is not the same as an exceptional event (like 2008) that could wipe out over 50% of your portfolio. In 2008, I had about 400k invested and when it crashed, I had access to cash and took advantage. If I lose 1 million, I wouldn’t have access to enough cash to buy cheap stocks to make a difference in my portfolio if I would be invested 100% in stocks. That’s why I feel strongly about protecting what I already have.
Hey Jeremy,
With a 100% stock allocation, how much cash would you keep on hand? Would you change your withdrawal strategy at all to be more responsive to the higher volatility?
E.g. In this research paper from Vanguard: http://vanguard.com/pdf/s823.pdf
you might change from strategy 1 (4% withdrawal of year 1 portfolio balance + annual inflation adjustments — the standard 4% rule), to strategy 2, or 3 (withdraw 4% based on what your actual portfolio balance is each year).
Thanks!
I’d still go with the 3 months cash buffer we have now, just for cash flow management. Cash is still part of asset allocation, so if you keep too much of it you are no longer 100% stock
It’s possible to model those 3 withdrawal strategies in cFIREsim. It covers those 3 (inflation adjusted, percentage of portfolio, ceiling and floor with non-inflation adjusted) plus 5 or 6 others
We are following the GCC Withdrawal StrategyTM. We could live in the US/Western Europe/Australia on a 4% withdrawal rate, but instead we started traveling in Mexico and Central America at much less than 4%
This has a doubly positive effect. It helps with the psychological transition from accumulation to drawdown, and minimizes portfolio load in the critical early years. Although the former was our primary motivation
My other more wishful goal is for the portfolio to become too big to fail. If 10 or 20 years from now we could live in Western Europe on a 1% withdrawal rate (for example), then a 50% stock market decline would result in a 2% withdrawal rate. A 75% decline would bring us to a 4% withdrawal rate. No big deal
In the short term, we can use geographic arbitrage to adjust spending based on market performance
What is your definition of too big to fail? Thanks
I don’t have an exact answer. It might be something where I know it when I see it
Technically, a 4% withdrawal rate is close to being too big to fail. It would have survived in 90% of historical periods, and better with some adjustments in down markets
A 3% withdrawal rate would have survived 100% of historical periods
Or would it require a withdrawal rate lower than current yield on the S&P500, currently 1.9%?
http://www.multpl.com/s-p-500-dividend-yield/
An analysis by Michael Kitces implies when a portfolio reaches 150% of its starting value, it is too big to fail, because it will support a modest increase in spending without having to go backwards. But this is for “standard” 30 year retirements, not sure if it will apply to longer ones.
http://www.kitces.com/blog/the-ratcheting-safe-withdrawal-rate-a-more-dominant-version-of-the-4-rule
In other words, a 2.67% withdrawal rate.
If your getting into stocks now your probably buying at the top which is what dumb money always does. http://www.smartbounce.ca/ignore-this-signal-at-your-own-peril/
I like the nomenclature. I’m sure that guy is really popular at cocktail parties
Is there a link for a fund that this guy controls, so we can see how his investment advice has performed over the past 10 or 20 years?
Here is his performance link.
http://www.valuetrend.ca/performance-investing-portfolio-management/
Too bad we can’t see the data from 2000 to 2008. Did he call the top in 2000 and 2008 and get out? Did they call the right time to get back in? Did they short on the way down and make billions?
Or is it like every other active management fund, where they close the fund after they lose to the market and open a new one? The guy has been managing investments since 1990 (and is obviously still working?) so why can we only see performance data from 2009 onward?
One cool thing: the guys name is Keith Richards. I wonder how his investments have performed compared to the Rolling Stones member
I believe he started his company in 2009, before that he was working as a portfolio manager with a bank.
Looks like same thing happened in June of 2014, but then the SP was steady so the “smart” money reconverged with the “dumb” money. Why is it different this time around?
Math analysis like this makes me feel warm and fuzzy. Awesome post Jeremy!
Thanks Joe. You’ll probably like several of my upcoming posts as well… I’ve been spending lots of time in Excel
Reading your post pushed me to finally go on Vanguard’s website and exchange all of our shares in Vanguard’s Target Retirement 2045 for VTSAX. I’d been meaning to do that for awhile but just kept putting it off, so thank you for the needed push.
The money was already mostly in stocks, but I’m happy to be rid of that last little bit of bonds, and the expenses for VTSAX are less than a third of what it was costing us for the Target Retirement fund. It doesn’t make any sense to pay .18% to get lower returns when I can pay .05% for better long term results. I don’t need bonds to smooth out volatility. I could care less about day to day fluctuations in the prices of the stocks we own.
Like you, I want to continue growing our portfolio until it’s too big to fail. I’m planning on continuing working and investing 50%+ of our income for the next year or two and keeping 100% in stocks. After FIRE, especially during the first few years of ER, we’ll just reduce our withdrawal rate during stock market downturns by using geographic arbitrage and/or working part time teaching English or whatever else seems like a cool thing to do at the time.
Thanks for the work that you do, Jeremy!
Sweet! Low fees, flexible withdrawal rates, optional future income, and a high percentage of equities. That is the recipe for a long and happy retirement
I think you should keep a small percentage in bonds eventually – deflation is a pretty scary monster and 10% goes a long way to protecting yourself in case what’s happening in Japan and what EU is trying so hard to fight off eventually happens in the US
But agreed, right now, there’s not a reason to add any bonds
I’ve never lived in a deflationary environment. Post 2008 maybe, if the printing presses weren’t kicked into overdrive. But I don’t see Japan and EU as scary, really.
I’d rather defer to the statistics. Even in the Great Depression, a 100% stock portfolio did pretty well. I’m also not really a market timer, so if bonds were important I would just stay in bonds now as opposed to switch to them at some point in the future
Hello,
With all of your international allocation being in VEU, I take it you feel you have no need for international small cap exposure.. May I ask why?
Most of my purchases were prior to 2011 when VXUS was created.
VXUS is about 6% small-cap. Those same holdings could be purchased by buying VSS in a 17:1 ratio. As I capital gain/loss harvest over the years, I’ll probably move my VEU position to VXUS.
Update: I exchanged VEU for VXUS at the end of 2015.
The US stock market looks overpriced here while Europe looks much cheaper. I will wait until nasdaq closes over 5000 which was the dot com high of 2000 before i add anymore US stocks. My investment advisor friend says the smart money is getting out of USA stocks in anticipation of a correction.
Wait, you’re going to wait until the US stocks go UP before buying more of them? That’s kind of the opposite of the whole buy low, sell high thing. Not saying it’s wrong though. My former boss is a fan of waiting till things go up “so he knows they’re solid investments”. He seems happy enough still working at age 72.
The nasdaq is the last exchange to take out it’s year 2000 level of 5000 so when and if it does and holds we should be good to go.
You have had lots of great posts recently. It is like you having been reading my mind.
I think that this post is more specific to your situation rather than a general analysis that anyone can use. That is because the cFIRESim allocation investigation uses portfolio size and annual expenses as inputs. So you can get a 100% success rate using a $25K draw from a $1 million dollar portfolio with at 30% stock allocation. Or you can get a 90% success rate using a $45K draw from the same portfolio with a 70% stock allocation. These different annual expenses would lead you to different conclusions about the best allocation.
I think a better way to illustrate this would be a series of curves using 2%, 3%, 4%, 5%, and 6% for the annual expenses. Then a person could decide that they need to save a portfolio large enough to live off of 3% in order to make their portfolio last with the allocation they are comfortable with. This is preferred for planning retirement rather than deciding that I have retired and I need 5% of my portfolio every year and then determining that I MUST be in 90% stocks in order to not outlast the portfolio.
Keep the good posts coming.
All of this data is based on 4% withdrawal rate. It is not specific to us
Have you read The Black Swan? (Sorry if this sounds rude; I don’t mean it to be!) I don’t think that Taleb would agree with this style of analysis. As defined by Taleb, a Black Swan event is not just a market crash—it is a completely unexpected event with outsized consequences. By using historical data, cFiresim is blind to Black Swans because it uses past experience to predict the future.
Taleb advocates a “barbell strategy” (combination of very low risk and very high risk), but I am not yet convinced that the average investor would succeed with such a strategy.
That said, Taleb is a big proponent of making yourself robust. Maybe one strategy for your lifestyle is to remain 100% in equities, but to invest in your continuing experience/education/health such that if there were a Black Swan event that wiped out your investments you would be in a position to take care of yourself.
Hi Adam, no worries, if I am incorrect about something I like to know about it
Although in this case, I think we are saying the same thing.
Sometimes people use cFIREsim and try to fine tune asset allocation or minimize net worth required to get a 100% success rate. My point in mentioning the Black Swan concept is that something will happen in the future, whatever it is, and one consequence will be stock market declines or major business failures. Nuclear holocaust, a virus wipes out the world supply of corn and soybeans, or the zombie plague, who knows. So if cFIREsim says 100% success rate, and you believe it, you have some serious false confidence
If half the world population becomes zombies trying to eat the other half, asset allocation is irrelevant
Hi there. Avid reader of your blog. I see your current portfolio also has a small portion of international stocks. Could you please fill us in on why it is “only” around 16% and if you living mostly abroad influenced your decision making when you built your portfolio? Generally, I am on your side with regards to having a small bond portion. But I am struggling to identify what is a decent US vs Int’l. ratio. I am not living in the US but my gut feeling tells me that my place of residence should not make any impact on my investment rational. Wouldn’t the easiest and cheapest be to simply buy a world fund? Thanks for your replies and keep up the good work! :)
Hi Kalergie
The International portion started out larger, but it has gone down in value over the past few years while the US portion has grown and I haven’t rebalanced. According to the Personal Capital asset allocation tool I should double my International exposure
VTI / VTSAX does already have a large component of International exposure. For example, how much profit does Apple make outside the US? A lot. It’s very low expense ratio while offering full US coverage with companies with large operations abroad make it more appealing to me that a world market fund
If we were to plan to spend an extended period of 20-30 years in Europe, I might consider holding more assets in Euros, but barring that I’ll stay mostly in USD. But I suspect we will end up with a base in the US long term, especially as GCCjr approaches college age
Cheers
Jeremy
Hi Jeremy.
Gotcha! Thanks for the quick reply. Appreciate it!
I agree that most US companies have international exposures, but what about the fact that global stocks are trading at a cheaper valuations than US stocks. Shouldn’t you take advantage of your higher currency to buy cheaper European stocks
Hard to say. I can see reasons why European companies have lower valuations (higher cost of doing business, more expensive social safety net, etc…) and after years of doing a lot of business in Japan and Korea, the companies I worked with had at least 3-5x overhead compared to similar US companies. I know my target asset allocation says I should double the current size of my international exposure, and I will do that whenever I get around to making changes
Jeremy, I was also wondering if you have a specific reason for choosing the ETF option of your funds (e.g. VTI) rather than the mutual fund version (e.g. VTSAX)?
Thanks.
Either way is fine, they are equivalent enough
Found your blog through msn.com and inspired to learn more about a subject I always feared, investing.
I max out my 401k and Roth IRA and save 50% of take home and been shoving it into an online saving account out of fear of investing. Maybe it’s time to open up a taxable account but I don’t need it to generate income. I’m in the 28% tax bracket from working.
Does that mean I should invest in tax efficient MF/ETF’s instead of something like VTI?
I really need a book to start educating myself, could you (or some of your readers) recommend something?
Hi Dave
To get started, I recommend reading through Jim Collins’ Stock Series. In about 2 hours of reading, you will gain an understanding of how to invest and the psychology of investing
That will provide a nice foundation
Cheers
Jeremy
thank you, This seems like a perfect place to start.
Great post as usual Jeremy.
You said “Most of the studies I have read show holding cash for the purpose of buying in a future down market almost never make up for the lost opportunity during the good times. With the stock market up 3x since 2008, the drop would have to be incredibly severe.”
I have to much cash and am struggling with how to transition over to more equities. It’s a tradeoff between the fear of going all in at what could be a market top, versus having the lost opportunity because I chose to dollar cost average over too long of a period while the market went even higher than we are now.
Thoughts on that?
Thanks,
Chad
Thanks Chad
In my opinion, the best thing to do is to pick a target asset allocation and stick to it. If putting all of your cash into stocks makes you feel uneasy, then that probably means your target asset allocation should have more bonds as opposed to not taking action. The right asset allocation is one that allows you to sleep at night
If dollar cost averaging gets you to take action, that is the right strategy
I heard just as many people claiming the stock market was over valued a year ago as I do today. Are any of them right? I don’t know. Neither do they
Having 100% equity allocation doesn’t make me feel uneasy. The act of buying a substantial amount of stock (VTI or other) all at one price, at all-time highs, makes me feel uneasy. Of course, sitting on too much cash while the market continues to make new highs doesn’t feel good either. Quite an internal struggle.
I can relate. That is why I still have this bond position that I should have gotten rid of 2 years ago
I’m currently 100% stocks and was following Jim Collins’ advice to only buy stocks in my accumulation phase and then buy bonds closer to retirement, but after reading this I think I’ll just stay the course. Fantastic post. Thank you. Definitely made me reevaluate my plan.
Hi Semira, thank you, I’m glad it made you think
As long as we are flexible with our spending and the volatility doesn’t impact our mood or ability to sleep, I think long term all stock is the way to go
Bisutti,
I submit that borrowing money and using the difference in rates to compound return is a perilous path. Leverage seems an easy way to riches but it is the road to ruin. Many people who employ borrowing as a device to compound return inevitably find themselves broke and crying in their soup wondering what happened.
I caution my clients against leverage. My accounts are marginable only so I don’t have to wait for trades to “settle,” but I never use the margin capability even though my 25% annual return far exceeds my cost of borrowing.
The reason is the aforementioned black swan events I can’t predict. The only way to handle extreme swings in the market is to have enough equity so you can cover at all times. To prevent being wiped out, one must have sufficient flexibility in your portfolio so as to be able to weather the storms.
In theory I should be able to borrow 100% of my account and make twice as much money, right? However, although I may end up with 25% at the end of the year, my holdings might be down 50% at some point during the year. If at that point I am leveraged 2:1 I will be wiped out and can’t continue.
Leverage can sometimes allow one to compound wealth in the short run but it’s gambling to employ it as a long-term strategy. As the old story goes, if you have one foot in boiling water and the other in a bucket of ice water, on average you are NOT feeling fine.
Best of luck to you!
I have to disagree.
I employ 3x leverage funds which use no margin accounts.
I also think people over-bias and -emphasize black swan events that occur less than 1% of the time forgoing the 99% of the time when the market is on an upward trajectory.
I have a couple years’ liquidity at the ready. Everything else I deploy into the market.
I take the heart the 80/20 rule of finance where the top 10 days account for the majority of the gains. Which is necessary to offset and exceed the top worse days in a given year.
Life is a gamble. To let your stress hormones dictate avoidance of all possible risk is not a realistic way to manage money or life.
Stated more directly, though we know the 80/20 rule applies here as it does many other places, we don’t know when the Pareto-optimal top 10 days will occur. Historically, the top 10 days usually follow, unsurprisingly perhaps, the bottom 10 days.
Staying out of the market, missing any one of those 10 top days, will do considerable damage to your portfolio. It’s also the main reason why GCC and other value investors made big bucks from the 2009 fiasco.
I know many techie friends and co-workers of mine, otherwise super smart peeps, convert everything into cash. Economic reasoning is hard to come by when FUD is flying around left and right 24/7.
They locked in the losses and missed out on the gains when the 10-day roulette table turned favorably and they weren’t around anymore to play. They now have to work double-time to make up for those gains forgone, meaning retiring later if at all.
This finance rule was spelled out in the literature since the 70s by Professor Fama, a father of finance. Unfortunately CNBC and its ilk aren’t incented to cover it.
Bottom line, timing bad. Time-in great.
http://www.businessinsider.com/investors-miss-stock-market-rallies-charts-2014-10
I’m wondering why you’re uncomfortable sharing the links to the leveraged ETF info.
Fantastic site, I’m most interested in how you have achieved the passive revenue stream from your equities. The asset allocation shown in your posting above results in roughly 2.1% yield based on today’s market values. Obviously you have acquired these equities over time so your actual yield is probably higher. Do you track this “effective yield”? Would it be safe to assume that your dividend yield is well above 4% after 10 years of accumulation?
I understand that you take these dividends in cash now, but durring your accumulation phase, did you reinvest the dividends?
I apologize if this was covered elsewhere, I tried to read most of your posts and the comments before posting here.
Thanks!
Hi John,
I don’t think I’ve talked about this elsewhere
I don’t know our effective yield on original investment. I could probably calculate it, but knowing the number wouldn’t change anything
While working, I always auto-reinvested dividends. This is still the case in our tax-deferred accounts
This post touches on how we manage cash flow
https://gocurrycracker.com/cash-flow-management-early-retirement/
Hope this helps
Jeremy
The stock market is very high right now, do you recommend buying at these high prices or holding out until it evens out some? For ex: VTI’s range this year has been 93.58-110.09 (108.61 today).
Thanks!
I would only be guessing
I noticed you mentioned the only regret you have in 2008 is not having more cash to buy more on the low.
Doesn’t that makes a reason to hold some bond/money market instrument so that we can dump in to equities during downturn?
Which is the reason why I always thought holding a portion of easily cash-convertible assets (bonds or money market instrument) is important.
Last year during oil price drop my home country Malaysia has a dip in the stock market, I invested my cash into the dip which now already recovered to the initial level before the dip.
It wouldn’t be possible if I don’t have cash.
What’s your thought on this?
We could put this in the category of market timing
You might be waiting for a dip that never comes, or isn’t large enough to compensate for the lost gains
Your average target date fund would probably have high fees.
The Vanguard Target Date funds are not bad, ~0.18%.
Not as good as VTSAX, but not bad
Hey GCC – I believe the “cash” portion of your asset allocation from the Personal Capital graph is not from the Capital One 360 account. PC does not include that account in the portfolio allocation totals, but rather only the accounts in the “Investments” category. I wish they would include Savings accounts to give a more accurate asset allocation.
Correct, cash accounts aren’t included. I would like to see that change too (although we only have ~$3k in the CapOne360 account right now, so it doesn’t impact the numbers much)
For those of that save upwards of $2-4K per month, would you recommend biweekly/ monthly contributions or waiting until its a sizable 10k and lump sum in? its sort of a DCA vs Lump Sum debate on weekly savings.
curious for your response and I admire and respect this site tremendously!
Hi John. Either way, whichever method is most convenient
and for the record, I am 37 yrs old, 410k invested 93% stocks / 7% bonds. Ive been slowly reducing my bond allocation but also question if now is the right time to do so
I’m retiring in 6 months (age 65). I will have a consolidated IRA/401k that I should never have to touch. Between social security, a small pension and a nice paid for home we will be able to save about $1,500/mo after normal expenses without touching the IRA money. Logic says it should be 100 percent stocks for maximum terminal value. I am currently at 70/30 stocks/bonds. Like you, I’m having trouble pulling the trigger on getting rid of the bonds altogether. Maybe because we all feel the bull market is getting long in the tooth, although of course it could go on like this for years.
So I subscribed to your blog, and I’m waiting for you to pull the trigger!
Hi Kenneth
I would consider SS and pension as part of your bond portfolio. Since these cover all of your spending, and then some, you couldn’t really have a more safe position
Logic could also say that you’ve won at life and finances, so there is no need to aim for more wealth. There is no problem with a 70/30 allocation
Note that with 100% stocks, it isn’t guaranteed that you will achieve the maximum terminal value. 100% stock could do much worse than your current 70/30 portfolio, we will only know after the fact
All the best
Jeremy
Hi Jeremy!
I’m new to investing in mutual funds and wanted to ask if VTSAX paid dividends.
Jenny
It does, currently a bit less than 2%
More details here
Jeremy, my apologies if you’ve already addressed this, but assuming you’re going to do 100% equities, what percentage are you going to allocate for US stocks versus International stocks?
We have roughly a 75/25 US/International split. If we were staying in the US, I would probably tilt that more towards the US. Since we plan on spending the majority of our time outside the US, we hold some International to provide some currency hedging
Note that US companies make a large percentage of their revenue outside the US, so you get some International coverage without specifically trying to invest internationally.
Great blog! For your taxable dividend account(s), which broker(s) do you use? Do you think it’s a good idea to use a different broker than your IRA accounts? I currently have IRAs with Vanguard and I want to build up a taxable dividend account. Not sure whether to stick with Vanguard or go with Charles Schwab or Scottrade. Would be great if you could do a post comparing brokers and whether there’s a need for more than one depending on asset amounts.
I would like to know the answers too. may I have it once you have it? Thanks.
There is no need to have more than one broker. Just open a standard brokerage account with Vanguard
We have all of our investments at Fidelity, but this is only because both of my 401ks were with Fidelity and I’ve never bothered to make any changes
I (with financial advisor A’s advise) bought(open) an life insurance saving account, on 7/2013. Suppose to pay US$10520 every year for 6 years to mature and start to have 3+% interest after that. At the end of 2013, our (my advisor managed my investment account too) investment made some money, we took profit, plus some premium investment money $45766 in total to pay off the insurance account. (get discount to pay in full. That What I thought and so happy my advisor had great money management stratiage. In stead paying off every year’s liability, he signed a 2nd insurance contract agree to pay $45766 every year for 6 year . Without letting me know it. Until 2 months ago, a new advisor B. assigned to me (because A left, went to another financial institute). B. found out my accounts were not paid on scheduled….
B and her manager said they tried to express the situation to NAN SAN insurance company, but Nan San seem not willing to resurrect back to 11/2013’s my understanding of paying off the 1st account. B and manager suggested my to take big lost (from $ 45766 down to $21000 ), cancel the 2nd contract. then, take the $21000 to pay the 1st insurance.
I am not willing to do that, feel very unhappy about the whole thing and don’t know what to do. (I did contact A, he never respond to my email or LINE call.)
What will you do if you were me?
Thank you for your attention.
hire a lawyer?
I know. If you were me: far away at Florida, how to do that?
thanks.
And I don’t quite trust Taiwan lawyer or organizations= hard to know who is OK
I don’t know
That’s why U.S.A. still is the leader of the world. trust worthy is the secret. China and Taiwan has long way to go and lots to learn !!
Have a wonderful stay in Taiwan, don’t get in to trouble there, just enjoy the bright side of Taiwan. I am still learning your -0- tax , pretty hard for me to comprehend. : ), don’t call me IQ law. : )
I’m a few years behind you in starting the pursuit of ER. Had always been in my mind, but your concrete recommendations and living it out have made the dream a true reality. We’ve been focusing on debt the last 1.5 years and will have it all knocked out at the end of this year.
In https://gocurrycracker.com/roth-sucks/ ‘Conclusions’ you spelled out a savings priority list (very helpful by the way. I wasn’t placing HSA as high as you had it). Given your list, mine looks something like this for 2016:
1. max 401k (100% traditional, 0% roth = 18k)
2. max HSA (married couple = 6.5k)
3. max SEP IRA (~25k)
4. 529 (2k)
5. Brokerage (shooting for 80k)
My question relates to asset allocation across multiple accounts; particularly in thinking that I’ll have ~20 years of draw down from taxable accounts (shooting for the $850k mark in brokerage account). Assuming I retire at 40 (the goal):
What approach do you follow using http://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts as a reference point?
Thanks a ton in advance for any feedback,
-Joe
PS. 31 and starting today — you’ve put me on the (defined) path to ER. Thank you! I hope to be able to pick your brain over the next few years :) You talked me out of buying a house as well.
Hey Joe, thanks so much, glad some of these posts made you think. Also, congrats on your awesome level of annual savings!
I think we follow something like the bogleheads plan, putting tax friendly stuff like index funds and dividend stocks in the brokerage account and tax unfriendly stuff like bonds and REITs in the tax-advantaged accounts
This post might help with the drawdown: https://gocurrycracker.com/gcc-vs-rmd/
Good deal. Thanks for the feedback. Of course, with 100% equities, the question is simplified even further!
Just read through the drawdown post as well. Great content, sir. Much obliged.
Ran across this today — http://news.morningstar.com/articlenet/article.aspx?id=712267. For someone considering 100% equities, the second graph’s red line sure is interesting. I think a tilt towards mid (VOE) and small cap (VBK) would be justified for those already accepting the 100/0 risk/reward. I’ll be looking to approach roughly 55/33/12 (large/mid/small) in the coming months versus VTI ‘s 72/18/9.
Have you done any analysis of different market cap exposures?
I haven’t really, but I would expect small cap to outperform large cap over the long term. In my 401k I have VSGIX and VIIIX, and over the last 10 years the small cap fund has grown 2x the large cap.
Hi – I’m wondering about your global equity allocation target (75/ 25). I’ve read several recommendations of 50/ 50 (US/ foreign) and a few 33/ 33/ 33 (US/ foreign developed/ foreign emerging markets). Rationale is better diversification and ultimately higher long term return (period re-balancing).
I also noticed that personal capital target’s 60/ 40 allocation for me (US/ foreign), but there’s not much in the way of explanation.
Thanks for your thoughts and a great blog!
We’ll only know what the best allocation target was in hind sight. As companies become more global, I think it matters less.
I’m partially inclined to hold more US assets after years of personal experience working with companies based in Japan/Korea/China/Taiwan. Cultures where failure is an acceptable outcome will drive more innovation
If you are living entirely off your dividends then I can see how 100% stocks is not risky. But in 2008 I remember several firms cut their dividends. How would you handle such a situation without cash/bonds and declining dividends unable to fund your living expenses?
What are your thoughts on sequence of returns risk especially in the initial retirement years when they inflict max damange?
Do you have posts indicating your nest egg size and also how much are your annual expense?
Spend less? VTSAX dividends were only cut by 3% in 2008 and ~12% in 2009, and are currently about 50% higher than they were 5 years ago. Otherwise pull out some cash when doing portfolio rebalancing.
See the Hacking the Data and Foundation For Long Term Success sections in my 4% Rule post for thoughts on sequence of return risk.
You can see annual expenses and required nest egg details here.
According to this site ( http://www.portfoliocharts.com ), the “Golden Butterfly” portfolio will support a SWR of 5.8% over a 40 year period. The same analysis for 100% stocks is less than 4%. There would be higher fees associated with holding these funds but I don’t think it would overcome that difference. I’d love to get some thoughts on this from you and your readers. The site has some interesting graphs and portfolio comparisons.
Golden Butterfly Asset Allocation:
20% Large Cap Blend
20% Small Cap Value
20% Long Term Treasuries
20% Short Term Treasuries
20% Gold
The Portfolio Charts site makes some great charts.
It is always tempting to search through history to find an asset allocation that would outperform. Define outperform however you like. The question then becomes, is this repeatable going forward?
This is a near impossible question to answer, doubly so with the Portfolio Charts data set which only goes back to 1972. Is it reasonable to make claims for a withdrawal rate over a 40 year period, when there are only 4 possible 40 year periods since 1972? A sample of 4 has zero statistical significance. By contrast, an all stock portfolio has a median withdrawal rate in perpetuity of ~6% over a much wider period
https://gocurrycracker.com/the-go-curry-cracker-endowment-fund/
A limited data set has other problems. The dominant trend in interest rates since 1980 has been downward, driving treasury prices up.
http://www.multpl.com/10-year-treasury-rate
http://www.multpl.com/30-year-treasury-rate/
Do you want 40% of your assets committed to Treasuries that are guaranteed to drop in value as interests rates rise from historical (and unprecedented) lows? And another 20% in an asset with zero intrinsic value?
I most certainly do not.
Thank you for that perspective Jeremy. I’m now at 85% stocks after shifting 15% out of bonds over the last 6 months.
Quick question: If I did a 90/10 or 80/20 Stock/Bond Portfolio and then adjusted to 100% during market downswings, what would happen? I’m curious what is the missed opportunity to have that flexibility to buy cheaper stocks when available. Thoughts?
Hi Jon
It really depends on how much the stock market increases before you get a down swing. Since the stock market general trend is upwards, the odds are against you on this one.
But that’s probably OK. If you retire into the early years of a strong bull market, your 80-90% stock position will see you wealth grow to new heights. Your retirement is looking very secure. If you retire just a year or three before a major stock collapse, then you can take advantage of low prices to buy stocks on sale. This is why our portfolio still has bonds.
Cheers
Jeremy
Thank you for the post. Very thought provoking and compelling.
However…
In the article and the subsequent comments, you have articulated 3 (three) separate reasons why you still own bonds (paraphrasing):
1) No real need for future growth, therefore just haven’t gotten around to exchanging bonds to stocks.
2) Nervous about potentially high current stock valuations, therefore hesitant to lump sum bonds to stocks.
3) Agree with the “dry powder” theory and are holding bonds to sell into stocks at a future downturn.
Number 1 is in your article, 2 is early in the comments, 3 is a few posts above this one.
If you still hold bonds today, what is the reason?
All 3? Or maybe laziness?
re: #3, my comment was more in regards to the sequence of return risk in the early years of retirement than about dry powder
Great reading.
I’m in mid 20’s and would like to know if it is better to own a family home (have loan), where I live with my husband or should I keep the loan and invest into ETF?
So in general did you own your home first before investing into stocks or how would you recommend on that?
Hi Petra, there is a large amount of personal preference in this decision
For us, we will be renters for life
https://gocurrycracker.com/renters-for-life/
Thanks for the info…
Considering that I’m from abroad (non US citizen), I cannot open an account with Vanguard and buy VTSAX.
Do you recommend some broker specifically (e.g etrade that is one of the rear ones offering trading in my country). Fidelity has offer in my country, but fees as so high as they are using distributor (bank) who charges extra fees and can only purchase fidelity funds.
So my choice would be to by VTI via broker account (etrade)?
Any comments?
Is there any downside of owning VTI over VTSAX?
Thanks
We own VTI (no VTSAX) There are minor differences only
Any brokerage with low fees would work
Can’t bring myself to pull the trigger on a 100% equities portfolio because of the “sleep at night” factor, and also because I’m a Fed employee with access to the G Fund, which is zero-risk. It’s had a 4.9% annual return since 1990, and 2.98% in the last 10 years.
http://www.tspfolio.com/tspfunds
Not great, but guaranteed, and at least from the charts I’ve looked at, has kept pace with or beat inflation.
http://www.inflationdata.com/inflation/inflation/DecadeInflation.asp
What I can’t believe is that I’ve continued to invest in the dogshit I Fund (EAFE/MSCI index) despite it’s abysmal 25-year track record! (just decided to drop from 8% to 5%, though in truth I feel I should drop it altogether).
Great article, and one that finally pushed me to just get off my ass and get to 70/30 where I’ve wanted to be for a while now. I was lucky enough to have gone to 65/35 (from 60/40) back on Aug. 25, when the market reached the bottom of that last correction! Should have just gone to 70/30 then, but was too much of a pussy. So thanks for the push. 70/30 should suit my needs just fine.
It looks like the Old Gray Lady agrees with you ,so, it must be right? :)
http://www.nytimes.com/2016/02/13/your-money/how-much-of-your-nest-egg-to-put-into-stocks-all-of-it.html
If your rationale for 100% equities (in VTI) is based on the historical data, what’s stopping you from being 100% in a small-cap value fund rather than VTI? Historically, it will outperform a TSM index significantly: http://www.moneychimp.com/articles/index_funds/index_portfolios.htm . I understand the argument for diversification, but you’re essentially arguing against that in this post in a search for return. Would welcome your thoughts!
re: based on historical data. This is only true in part. The primary motivation is the difference in intrinsic value of equity (business ownership) vs bonds (debt.)
The debate is one of value of owning certain asset classes, not diversification within an asset class.
I agree with the conclusion on the link you shared:
“This means that the very best index must be … your own judgment call. Seriously, the future is going to bring so many economic surprises that trying to pick the optimal index methodology feels demented. It’s probably more sensible to stick with a fund that charges low fees and has a reputation for respecting its investors, and then thinking in terms of very broad allocation guidelines (like “mostly TSM, plus some Small Value”).”
Thank you sir! Always enjoy reading your blog.
Just a quick thanks again for this article as I poured a bunch of extra funds into my RRSP account. I rebalanced to have a 90/10 split between equities and bonds. Only time will tell how this will work out but with with the data supplied here I know the long run will treat me well. Cheers wherever you are right now :)
I am currently moving a large position from high fee mutual funds over to Vanguard’s low fee mutual funds. Do you suggest cost dollar averaging over the course of a year (or a certain time period)? And thanks for any advice on this.
Between DCA and a Lump Sum, do whatever you feel most comfortable with.
See Vanguard’s research for more.
But what if we hit another Great Depression with another 25 year recovery period?
What would happen if you went from 100% cash to 100% stock just before an economic period that was so terrible that people are still worried about the stories great great grandma used to tell 4 generations later?
If this is a concern, then you probably feel more comfortable with the DCA path.
But… in real terms, with dividends reinvested, the stock market exceeded the peak Oct 1929 value within 7 years. By the 25 year mark, the portfolio would have doubled.
https://dqydj.com/sp-500-return-calculator/
awesome post, I am 100% equity too. I can retire at 38, in 6 years, but I won’t, given that I think that’s when my professional knowledge would peak and I would like to use it and give back to society. I like the idea of mini retirement and working generally less than half time a year though :)
Congrats. Will you start working pro bono at that point, helping the least fortunate?
: ) Will you do it ?
GCC, I am glad I found your blog! I am new to it, so could you please tell me (or show me a link) why you invest in EFT instead of index fund? Thanks for the response!
You can think of them as the same.
What about the “rebalancing bonus”? You mentioned that you regretted not having cash to invest in 2008… Would a modest bond allocation not provide that? (Great posts, always — many thanks!)
It might work out that way. Or the stock portfolio may continue to grow, never again to return to today’s low prices.
Thanks… I am still struggling with that. (1) It seems that stocks don’t need to dip below today’s prices, they only need to dip below the bonds growth line, which, albeit shallow-ish these days, is not completely flat either. (2) I wonder whether “rebalancing bonus” can exceed the lost opportunity of holding more equity *even if* the equity and bonds lines never cross in the future. In other words, even if bonds indeed return less than stocks, could rebalanced portfolio of bonds + stocks (or any other less-than-perfectly correlated classes) return more?
Is 1.14% charge on bond high? What is bond’s normal charge?
Yuki: it depends. If 1.14% is the expense ratio of a bond fund or ETF, then yes, I’d say it’s high. Check what Vanguard charges for their bond funds — you can be reasonably sure that their cost is well within the “normal” range. If 1.14% is something else (individual bond yield?), then again, it depends.
One of the 403(b) vendors of my school charges 0.25% of adm fees on top of what Vanguard charges. That’s 0.30% total. I don’t understand why these vendors need to charge much when most of the work is done electronically. I would think, intuitively, that managing a fund, which is what Vanguard does, requires more work.
You are right. So, if we go directly to Vanguard to buy it, that would cut down the middle man (vendor)’s fee, right? My 1.14% fee charge is Franklin Temper ton bio tech bond, not very exciting, and it was go through a vendor I bought it, my first time in bond, so far, I don’t feel like it. I like stocks better.
Hi Yuki,
Yes, if I invested in Vanguard directly I wouldn’t pay the silly 0.25%, but… it won’t be pre-tax money.
Selena: exactly! You’ve answered your own “I don’t understand” question. They charge because they can. You are captive audience…
Yuki, there may be a bigger problem with your fund, besides the high fees. It sounds like it is very narrowly focused (biotech). It may not be appropriate for long-term investing, like in a retirement plan. (Amazing that some plans even offer such choices). You may want to speak with someone about a more appropriate portfolio.
You could read what Vanguard has to say about rebalancing.
The bonus opportunity you are looking for, however you choose to define it, may never occur. It is pure speculation. Instead, choose a target asset allocation and rebalance if/when appropriate.
So I turned 50 on Friday and I have been mulling about early retirement for a while now. What’s holding me back right now is that I’m worried +-1m won’t be enough to sustain my living expenses for the next 40 – 50 years assuming I live that long.
Having said that, I do suppose there is one more thing that is holding me back, I still have 2 more years before I can apply for naturalization, and I’m assuming that the INS would prefer to see me have a job that I go to.
I know financial planners always say that you should multiply your annual expenses by 25 and you will arrive at the figure you need to have to retire, but I’m guessing that is based on 25 years of life after retirement at 67? Correct me if I am wrong. If not then I’m set and should be able to walk away although I still do have a fixed expenditure in my mortgage. I suppose I could sell it and live a totally nomadic lifestyle like you guys do.
If I do that, my main question is how do you manage the withdrawal of funds, and from which account assuming that you have a 401K, a ROTH and an investment account.
Thanks! You guys are an inspiration.
I wouldn’t do it. I quit my job at 51 with a net worth of almost 2 Mil an impending pension of almost 60K startin at 55 and still find myself livin a very frugal existence due to financial security concerns. I’d at least work the couple of extra years.
Wow, you probably have a huge mortgage to find that amount not sufficient.
Thanks for the financial inspiration! I’ve got a meager investment account set up,and for a long time I’ve been telling myself to put more effort into it; you’re blog has lit a small fire under my behind! Just looking for some clarity about your asset allocation. This graph from Personal Capital includes both the 401K and brokerage account, right? Can you be more specific about which allocations are in the brokerage account? I’m also wondering how you manage withdrawals- you are living solely off your brokerage account, and have not yet touched the 401K, correct? I also have a couple small 401K’s from old jobs; currently I’m unemployed in grad school and staying home with my daughter. I have no idea what to do with them, so there they sit. Any suggestions? Should I be rolling them into an IRA? One is in Fidelity (great!), the other with some no-name management company that was cheap for my employer (not great). Safe travels!
Hi Mel
While in Grad school (low income, low taxes) is a good time to roll your 401k to an IRA, and then do Roth IRA conversions.
An example of Roth conversion:
https://gocurrycracker.com/go-curry-cracker-2014-taxes/
Withdrawals:
https://gocurrycracker.com/cash-flow-management-early-retirement/
Allocation:
https://gocurrycracker.com/2016-gcc-asset-allocation/
Im 90% equities. Im also having a tough time pulling the trigger on early retirement because of where the stock market is currently valued historically . The pe10 is close to 27 right now. The median being 16-17. My net worth maybe falsely advertising a comfortable retirement valuation when in reality it may be worth 20% less or more? Your thoughts on retireing on a net worth number that maybe too good to be true?
I’m so happy to find someone that doesn’t think having a 100% equity portfolio in retirement is crazy. Actually I have 90% equities and 10% cash. I have 62 positions consisting of individual stocks, mutual funds and ETF’s. I am returning 10+% per year. I’m 72 years old and have been investing for over 20 years on my own. I do not have a financial advisor. I’ve been through significant ups and downs in the market and have always come out ahead, but the financial gurus scare me. Their consensus is that I should have no more than 60% in stocks at my age. You have validated my approach to a retirement portfolio and I truly thank you.
What about going 100% on a small cap value fund?
See:
http://paulmerriman.com/four-fund-solution-table/
Wouldn’t that lead to even greater gains and more longevity for your portfolio long term?
Maybe. The volatility could kill the portfolio in the early years or send it soaring. But you wouldn’t know until after the fact.
Are you familiar with Paul Merriman’s work?
Some of his findings are quite interesting and counter intuitive.
He advocates splitting your assets beyond a s&p 500/total market fund.
I guess what you call slice & dice.
http://paulmerriman.com/ultimate-buy-hold-tables-2016/
In his podcasts he always recommends Small Cap Value as the asset class that has the highest returns and the volatility isn’t that much more dramatic.
Was wondering what your thoughts are about that.
Especially for those of us in the “accumulation phase” would it be better to use a small cap value fund to perhaps accelerate the process?
Thanks for everything. I really enjoy reading your blog. You have lots of interesting counter intuitive insights!
I’m not familiar with Paul Merriman, but that’s not that important. A lot of people recommend SCV and different asset allocation strategies.
The Portfolio Charts website will let you experiment with withdrawal rates for different asset allocations, including 100% small cap value.
https://portfoliocharts.com/2015/09/08/why-your-safe-withdrawal-rate-is-probably-wrong/
Good morning, Jeremy! May I ask if you are happy with your VEU performance? I am looking for index funds outside the USA. Would you still have VEU if you had another choice? How about VFWAX? Thanks for any insights and suggestions. :o)
VFWAX is the same as VEU. The former is just the Mutual Fund version of the latter.
Since this was written, I’ve changed my VEU position to VXUS. They are similar, but VXUS holds more stocks (mostly small-cap.) VXUS (the ETF) didn’t exist until 2011, or I would have held it sooner. See this
https://gocurrycracker.com/2016-gcc-asset-allocation/
I’m happy with both VEU and VXUS, in that they have tracked their target indexes with low fees.
Thanks! Considering how high VTI is right now, if you were working, would you still buy some? I have vtsax in my 403. It’s scary….I am debating whether I should purchase more for December as I have been consistent. I know some people saw that the market is full of ups and downs, but aren’t we too up?
Any thoughts appreciated! :o)
Jurema: If you look at the market over the last century, you will observe that the market has been at its all time high very often. https://en.wikipedia.org/wiki/Closing_milestones_of_the_S%26P_500
While your feelings are very normal, not investing now due to market sentiment would be considered market timing. And that is not a good approach. Investing should not have feelings involved at all. The trick is to buy and hold and if you hold long enough, the market will be higher than where you started.
I am currently sitting at 80/20 at 40 years old with a paid off home and zero debt. After reading this and mulling it over for awhile I will probably pull the trigger and move up to a 90/10 allocation and be able to sleep at night. My wife and I are bogleheads and frugal. Thanks for your effort in writing this article.
I am a Canadian in Beijing …. my wife is a Beijinger … I am considering Shenzhen SHE bond index funds such as 399298 etc and the Shenzhen composite index fund … the latter seems better than VTI Vanguard over the past 15 years …. when you do a compare chart on Google Finance … I can retire today but keep teaching here and doing Misshy Christian stuff etc etc etc … Have a Green Card too so don’t need a work visa etc etc … God Bless https://www.google.com/finance?q=SHE%3A399106&ei=CN4eWKmnNKS1igL5_of4Aw
Hi, hope all is well…Seattle just got it;s first taste of snow (1/4 inch of slush and of course the media is going nuts)…anyway
I divided my investments into having enough cash to spend for the next 13 yrs (I’m 47) which is earning 2-5% in high yield checking accts. I also move money around for special occastions…citi checking has a deal paying $400 for a 15k deposit held for 90 days. I also have a small biz which I need to fund my purchases for. My retirement money (money I’ll need for 60+ is 100% in equities).
My big concern is selling during a market downturn and never being able to recover since the shares are already spent.
I know you don’t have a property, but I’m considering taking a reverse mortgage to fund me through 62 to 67 to increase my social security
Have you read anything by Wade Phau? He suggests that a 3% withdraw is the new recommended withdraw rate given new advances in medicine and longevity
Continue to enjoy your posts. Don’t work too hard…you’re retired haha
I’m really trying to learn about investing, however this post leaves me confused. Therefore, I’m going to ask you a few dumb questions. 1. What did you invest your money in in the first place? I have a 403b, and my husband has a solo 401k. We max out both as much as we can. I see the dividends come in, however, those are just reinvented. 2. Should we start another account and start investing there? 3. How would we be able to use the dividends on a yearly basis before we reach 59? I’m aware of the conversion ladder, but that still doesn’t quick explain how dividends can be accessed. Please help! Thanks!
Hi Allison,
Have you read JL Collins’ A Simple Path to Wealth? It is probably the best way to get started with investing, and would answer all 3 of your questions (and more.)
We too invested in a 401k and reinvested dividends. You are off to a good start by trying to max those out. There is nothing really special about dividends per se, they are just dollars in your account, and you can access all of the dollars with a conversion ladder or an SEPP.
But I would start with JL Collins’ book.
Happy new year!
Jeremy
I think you are a little bit confused about how to interpret the Monte Carlo simulation. The standard deviation is more important than the mean. You say you believe the numbers. True, the mean and median are much better for the 100% than the 70%, but not much better than the 90%. You say the minimum isn’t any smaller … ok, but who cares because the minimum is an infinitely improbable outcome. What the Monte Carlo simulations gives you is a distribution of possible futures, and you are making your decision based on the mean, but the mean is just one outcome. Yes, it is the most likely outcome, but it is also 66% likely you could fall anywhere within one standard deviation away from the mean. That means really big losses if you are on the negative side!! Volatility makes a huge difference over the course of a 30 year investment. Huge difference. Look into it, you will be surprised. The increased volatility can easily wipe out your gains. Remember, a loss of 50% requires an earning of 100% just to get back to even! This is why volatility matters so much. If you select 100%, you will crash hard with the market corrections and you will require massive growth to regain what you lose. Also please understand – just because one allocation has a greater mean expected return does not mean it will end up that way in reality. You can have two funds, one with a greater average rate of return but higher volatility, and it will end up with less money than the other fund! I know this sounds impossible but it is true. Look into it before you stick to 100% forever. Personally I am at 90/10 because I am 31 yo. Good luck.
Oh man, all of the professors who taught my Masters classes in probability, statistics, and stochastic processes are going to be very disappointed.
Apparently my English professors too because none of the data above is from Monte Carlo analysis, aside from the two graphs that I shared for completeness (faulty as they are.) It is all from rolling window sequence of return simulations using actual historical data. (This is the standard cfiresim simulation mentioned throughout.)
I’m not sure how you reached the conclusion that I assumed only the mean was important, but if we run with that… I don’t disagree with any of your conclusions, except one: the terminal value is of importance. That the failure cases all failed in similar fashion indicates that portfolio collapse happened late in the retirement periods, suggesting there was time to course correct. As such, one of the worst case periods was studied in this post.
In any case, thanks for the well wishes.
I am about 92% real estate here in China, then Chinese stock market 6%, bank investment protected peer to company loans 4% …. I am thinking of trying the Shenzhen 399106 / 399102 … and another bond Chinese stock market index founds …. the above is the Shenzhen Composite Index and the Chinext index fund …. but have not pulled the trigger yet …. I could also go the Canadian route later …. as far as 100% stocks … I think it depends on your base funds … and whether you hold some emergency cash …. if you are older and/or have smaller base funds …. you may wish to error on the side of safety? … that is 90/10 mix or even more ….. if you had say over … 2-3 mill … then perhaps 100% stocks seems more logical etc etc etc … God Bless, China
Ooops that 4% figure should read 2% …and bond index fund … :)
Your blog got me started on early retirement and my wife and I are 2 years into our 10 year plan for early retirement. We are right on track for our goals and allocated 90% equities right now.
Do you think there are times when we should cash out some of our gains (in a tax deferred account of course) and go to perhaps 80% or even 70% equities?
I realize no one can “time the market” but reread this blog again, the part where you wish you had more money to invest in the 2008 downturn makes me wonder if I should be locking in my gains and preparing for the next buying opportunity.
Thanks
Hi John
“Do you think there are times when we should reduce equity exposure…”
Sure, but on a permanent basis. Overall, if you feel uneasy or generally concerned, then the right answer is probably to change target asset allocation.
We can all think of reasons why the market will fall… but we will probably be wrong. Sure, I would have liked to have had more cash in 2008. Who wouldn’t? But maybe the next buying opportunity is now.
Cheers
Jeremy
“Sure, I would have liked to have had more cash in 2008. Who wouldn’t? ” – I did
If you had Re-balanced your portfolio, you would have had cash to put in. In this one line, you have just negated the reasoning behind 100% Equities over the lifetime of your investment years. As sure as a Bull market, a Bear will come again, and then you can repeat this message. I don’t pretend to know when, but it will happen, and that is why Warren Buffet has a huge pile of cash at his disposal to take advantage of these opportunities.
Sorry, I am not a fan of watching a market grow and then crash 30-80%, and then take years to come back? I did that with the NASDAQ, never again. I lost years of investment return on that fund.
Only if you prefer emotions over statistics.
There are no emotions involved, only math. Once an investment has doubled or tripled, and depending on your investment horizon (when do you need the money) a prudent approach is to diversify risk. This can be done numerous ways, but for the most, a shift to non equities is a good idea. Is now a good time to invest in the market? Who cares, all the markets are up substantially, that is all we need to know.
It’s best to go with what you can stomach (emotions.)
Jeremy, your posts are awesome enough.
But then you go on to give helpful replies to your readers, sometimes YEARS after your original post?
Are you kidding me? Stop being so amazing. You’re making the rest of us look bad.
Is this a test?
Sometimes I just write sarcastic replies ;)
Have you ever heard of Andrew Hallam …. he is an interesting perspective … he is a fellow Canadian international school teacher …. married to an American … he is about the most knowledgeable fellow on investing for the common person … that I have seen …. https://www.youtube.com/watch?v=d7isPQ9fPWs Great 2 part podcast … God Bless, Beijing …
This piece was initially written a couple of years ago. Given the high use now of large (like VTI) ETF’s, do you believe they will increase or decrease market volitility? For example, since they invest in such a large basket/closely follow large benchmarks of investments even poorly performing stocks are more artificially buoyed up and vice versa. Also does this relatively new investment vehicle impact historical data results in ways that can be ascertained, in your opinion?
Perhaps it’s best not to look at TV or be too attached to news outlets. Historically there have always been risks, real and imagined, which have affected and are built into the markets/investing, but out of curiosity, in your opinion, how much do the current realities, which may or may not be meaningful anomalies and/or new realities impact the next 20-30 years of investing/market performance and participation (perhaps skewing historical performance)?
Some examples might include…huge divide of the haves and have-nots (greater investing wealth in hands of few vs many which would create a greater foundation/stability; potential cut backs of social programs that supported/reduced humanistic anxiety (Social security/Medicare, affordable health care, etc.), huge decrease of pensions for working folk (large corporate/government participation/orchestrated investing which may have given older generations a leg up on wealth accumulation and how much of that compounded money is in market vs younger folks accumulative 401k and additional discretionary Brokerage account investments); aging baby boomers retiring (will they stay in or exit equity market as to firm up retirement $ especially given recent gains/the sting of the most recent recession/ and potentially short window of possible new favorable capital gains treatment)); skyrocketing college, health care, housing costs, food costs (will younger generations have the money to invest in the market and given current largest wealth transfer will the receiving younger generations cash out to pay off huge their debt and use $ for just high cost of living/necessities); global warming/weather phenomena affecting large populations (ex: move from coastal areas inland (rising waters-shelter necessities); Arificial Intelligence/technology continuing to erode availability of jobs ?; and how do the overall stresses and strains of chaotic times (politics, health crisis, safety, etc) impact?
Do you believe the above are noteworthy or have there simply always been risks? If you were in your late 50’s what strategies would you employ?
Nothing has changed since I wrote this.
I plan to continue following this approach through my 50s and beyond.
100% Vanguard Total World Index for life. For us at least.
Living in Australia the only ETF my retirement fund allows that comes close to your advice is IVV via iShares Australia with a MER of 0.04. It is so hard converting advice into ETF’s available in Australian. I wonder if this is good enough?
Great post, I’m loving this blog. Im 21 years old and just beginning my journey towards early retirement. Im 100% in equities. I plan on staying this way well into retirement. Currently my portfolio is half VTSMX and half VGTSX. Although I have not experienced a bear market yet I am comfortable I can make it through one without making any bad decisions. I try to study history as much as I can and that gives me confidence that stocks will recover from the next crash.
two questions on risk assumptions on this:
(1) what if the market tanks 60% for say a few years? dividends would be slashed. where would you draw income ($50k/yr?) from?
(2) you’re self insured. what if you get hit by a bus and need $1M in medical treatment? what then?
Here are some links with thoughts on those topics. Note that in 2008 when the stock market plunged, dividends were only cut about 10%. I was self insured for about 5 years, and recently became covered under Taiwan’s health system (it was required.)
(1) paying annual expenses in early retirement.
(1a) case study of worst period in economic history
(2) emergencies are what travel insurance is for. It covers $1 million in medical expenses.
A fabulous post and great commentary. I refer my skeptical friends to your postings all the time, whenever they start giving me dire warnings about my allocation. For most of my life I’ve been primarily in the market, and have gradually moved to an ~95% equity position (~25% dividend paying individual stocks and ~75% Vanguard Index Funds), with the fund portion ~75% VHDYX and ~25% VIHIX. Does that sound reasonable? I am hoping to fund my retirement completely with dividends and basically forgo the 4% annual withdrawal rate, except for special vacations and the inevitable unknowns. I think that a basic but underappreciated aspect of this strategy is the need to be able to sleep at night, and hold firm, especially during periods when there are rivers of blood in the streets. Most investors I know simply cannot do that. It is a psychological variable.
Hello GCC,
Since finding your website this morning I have spent hours reading some of your past posts. I have one question or argument I need some help with.
I have looked at historical charts, and from what I can find. looking at a more recent period for the Nasdaq vs. S&P returns and over the prevailing 30 years or so (maybe even 40 or more) the Nasdaq has returned better results than the S&P. (Nasdaq is newer and hasn’t been around since 1926) Basically based on what I can find I, or anyone with a high risk tolerance receives higher returns with money held in the Nasdaq Vs. the S&P index.
Basically I have been stockpiling my 401(k) money and my regular investment account money into the Nasdaq fund under the assumption of a higher return. ( I am young at 26, and don’t expect to access any funds for a minimum of 10 years, but with my current lifestyle at least 20+)
So to sum it up, what is your view on an even riskier portfolio of not only all stocks, but one entirely in the Nasdaq?
Thank you! And again I have really enjoyed your thoughts and blog
QQQ is 100 companies, mostly tech. Not very diversified. Past performance is not indicative of future results, etc…
Hello GCC, I am a new reader and subscriber. Fast forward to the end of March 2020 before the FED bailed out Wall Street. Do you still feel the same about 100% of your portfolio in equities?
Our portfolio today is about the same as it was when I wrote this (90/10-ish.) I don’t plan on changing it, so I guess, yeah, I feel about the same.
March 2019 I sold a bunch of stock and bought bonds (details here.)
March/April 2020 I sold a bunch of bonds and bought stock, while also building a cash buffer (details here.)
You make a compelling case, but I’ve actually been investigating (and then following through on) further diversification. And, I hope, smarter diversification.
Instead of about 75% US stocks / 25% US bonds, I’ve been expanding into international stocks, an extra dose of value stocks, and REITs as well.
My thinking on the matter is twofold. One, extra diversification with high-performing assets should help my portfolio’s growth as well as reducing volatility, at least according to some research. Two, I’m not completely confident that historical patterns will hold in the future, so it makes sense to me to get involved in a couple different arenas to reduce risk.
Thoughts?
I submit that the “risk” of investing 100% in stocks is not a constant. Investing 100% in stocks when they are at historic highs is potentially much riskier than going “all in” after a crash. That’s why a variable asset allocation model works for me. At the bottom of a crash (’03, ’08, ’20), going 100% to equities makes some sense…and holding forever, even through future corrections and crashes. 90/10 at the bottom of a crash and 10/90 at lofty prices, works for me. If done well, it will lead to great riches. Market timing? Not necessarily, just common sense.
Yes, it is not a constant.
Changing asset allocation based on perceived market valuation is market timing
It might work. Might not. It is what I have done to date