Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
It is only a rare, rare possibility that it will take 20 years for the stock market to recover from a downturn. Even at retirement age a substantial allocation in stocks makes sense to provide a safe withdrawal of 4% or more. Being risk averse causes way more losses than being more aggressive with investments.
It is a terrible mistake to pull out of equities when you retire,
Having no equities at all is a big mistake. Taking a more defensive position and bringing an equity allocation down to somewhere around a 35% to 50% range is smart upon first entering retirement. Then the ramp up slowly adding more equities over the next 10 to 15 years to take on more risk is recommended. Of course the underlying assumption is this is a proactive stance, and not as a reaction to a sudden market drop being the reason. Setting this up when the market is at all-time highs, hasn't dropped, and the investor is starting retirement is a prudent thing to do.
If you are within 5 years of retirement, you shouldn't be 100% in stocks, unless you have a boatload of money invested. By that I mean that you can keep your withdrawals to something really low like 2% or less of your portfolio. That's not most of us.
I agree -- but I'll go further.
Very few people should be 100% in stocks regardless of the amount of money they have or the stage of their life. A 100% stock portfolio is almost never on the efficient frontier: you can achieve the same (or greater) expected return while simultaneously reducing your variance by adding non-correlated asset classes.
Even an entity such as a University Endowment which theoretically has a very long time horizon should not be invested in 100% equity.
Here is a great summary of why, written by Cliff Asness of Applied Quantitative Research:
Quote:
In a 1994 article “College and University Endowment Funds: Why Not 100% Equities?” Richard H. Thaler and J. Peter Williamson presented strong evidence documenting the historical superiority of investing in 100% equities compared with a more common investment policy of 60% equities and 40% bonds (60/40).
However, their recommendation that endowments invest in 100% equities actually mixes two distinctly different ideas:
endowments should take more risk than 60/40, and
they should take this added risk by investing 100% in equities.
Whether a long-term investor should take more risk is a fascinating and sometimes contentious subject that I do not address. Instead, this article focuses on whether 100% equities is the best way to gain more exposure to risk. The answer, generally, is that it is not, because a portfolio of 100% equities ignores the benefits of diversification.
Investors willing to bear the risk of 100% equities can do even better with a diversified portfolio, particularly when they are willing to lever. A diversified portfolio historically delivers more return, while not increasing risk (measuring risk along several different dimensions).
Regardless of which portfolio is chosen, this article argues that deciding how much risk to bear, and building a set of portfolios with the most expected return for a given amount of risk, are separate tasks. Choosing a portfolio of 100% equities based on their historical realized return misses this separation.
A long-term investment in 60/40 may, or may not, take enough risk. An investment in 100% equities almost guarantees an inefficient portfolio.
By the way, in the first sentence of the text quoted above, the "Richard H. Thaler" is the same guy who won this year's Nobel Prize in Economics.
Cliff Asness identifies multiple ways to simultaneously:
Beat a 100% equity portfolio, and
Have less risk and less volatility than a 100% equity portfolio.
Here's a simple way: maintain a 60/40 stock/bond portfolio and leverage it by 55%.
The subject seemed familiar. So I did a search -- I did post something here a few years ago. Here it is in more detail:
Quote:
Originally Posted by SportyandMisty
About a month ago on CNBC there was a segment regarding ETFs vs. “hand picking individual stocks” where two guest luminaries debated their respective opposing positions. They also had recent $300K Jeopardy! winner Arthur Chu on the segment, and Chu said both of those approaches were far too risky for him. Chu said he invests almost exclusively in (relatively) safe bonds.
One of the guests then said “Arthur! You're so young! You're barely 30 years old! You should be in 100% equities!”
That doesn’t seem right, I thought. 100% equities? Really?
The long-term annual ROI of equities (stocks) is much higher than the analogous long-term ROI of bonds. The traditional 60/40 portfolio splits the difference. See the following chart, which is 2nd nature to most investors, and is typically used to argue for the superiority of stocks over bonds. Indeed, in only a handful of 10-year timeframes does a 60/40 portfolio outperform a 100/0 portfolio:
In the above chart, the S&P 500 is used for equities, and the Ibbotson total return series for long-term corporate debt.
So, the obvious question is why bother to have any bonds in your portfolio if you are a long-term investor and can tolerate the risk?
Asness goes on to say perhaps the most important lesson of modern finance is that under reasonable assumptions the choices of (1) which risky assets to hold, and (2) how much risk to bear are independent choices. Under some simple assumptions, an investor chooses a portfolio of risky assets to maximize the portfolio's Sharpe ratio. Then, given the maximal Sharpe ratio of the portfolio P, the investor then chooses the proper mixture of P and riskless cash. This mix will vary from investor to investor because of differing tolerances for risk, but the relative weights among risky assets will stay constant. Feasible portfolios that maximize expected return for a given amount of risk are said to be "efficient."
The following table gives the data from 1926 through 1993 (remember, the paper I'm summarizing was published in 1996), restating the conclusion of the 1st chart posted:
Note that the comparison isn't really fair, as the 100% equities portfolio has substantially more variability (risk) in it than the 60/40 portfolio or the 0/100 portfolio.
Constructing a new portfolio makes the comparison more fair. Imagine an investor has already determined that (a) the 60/40 portfolio is the optimal portfolio of risky assets, and (b) the desired amount of risk is the same as a 100% stock portfolio (risk means standard deviation, of course). For a $1 investment, a NEW portfolio can be constructed by purchasing 20.0/12.9= $1.55 of the 60/40 portfolio, financing the extra 55 cents by borrowing.
The following charts restate the former, including this new "levered 60/40" portfolio:
Asness shows that for the exact same amount of risk as a 100% equity portfolio, one can instead have a levered 60/40 equity/bond portfolio that provides a higher compound annual return. Yes, a higher ROI for the same amount of risk. He uses his results to show that even very long term investors (e.g., 100-year investors such as university endowments) probably should not have 100% equities even in light of the historical superiority of equity returns relative to bond returns.
(He's financing the 55 cents of borrowing for each $1 invested by borrowing at whatever the then-current 1 month T-Bill rate is).
From 1926 through 1993, with the same initial investment of $1, the 100% equity portfolio grows to $800 while the levered 60/40 portfolio grows to $1291. Even though a 100% bond portfolio grows to only $40, using bonds in conjunction with stocks and leverage leads to an investment that grows to $1291. The investor who owns 100% stocks must bear the same risk and receive only $800.
Asness goes on to analyze scenarios with differing ways to look at risk (e.g., worst-case scenarios, etc) plus lots of other cases as well.
*****
I don't know what the data look like since he published his article in 1996 – there have been a ton of bad things the past 15 years such as the collapse of LTCM, the Russian debt crisis, the Asian (financial) Flu, the dot-com collapse, the bursting of the housing bubble, the Great Recession…
But in light of a talking-head on CNBC advising the Jeopardy winner to be in 100% equities, I thought I'd pass this along.
*****************************
I found some updated data:
Based on the data in the 1994 paper, the 60/40 portfolio earned the highest return per unit of risk. The updated chart through 2014 tells the same story.
Last edited by SportyandMisty; 10-19-2017 at 04:14 PM..
over a typical accumulation period which spans decades as long as 30-40 years 100% EQUITIES grew far more money than 60/40
since 1970 in after inflation returns 100% equity returned 7.40% after inflation
60/40 returned 5.80% after inflation .
1.60% over 30-40 years can be a whole load of money more . if we figure adding 10k a year to the portfolio's ,starting in 1970 , there is about a 1 million dollar difference .
for those in their accumulation stage with decades ahead of them mitigating short term temporary dips with bonds and permanently hurting long term returns has no logic to it .
as far as 100% equities in retirement , it would be very volatile but:
compared to 50/50, 100% equities has a 93% success rate vs 95% for 50/50 . pretty darn close . however 100% equities usually ended with a bigger balance left . it also supported longer retirements better than 50/50 and higher draw rates .
no i don't recommend 100% equities , but if a retiree did it he would have a wild ride but financially do just fine .
Last edited by mathjak107; 10-19-2017 at 04:47 PM..
FIRECalc looked at the 117 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 117 cycles. The lowest and highest portfolio balance at the end of your retirement was $-272,474 to $4,564,899, with an average at the end of $1,403,930. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 5 cycles failed, for a success rate of 95.7%.
---------------------------------------------------------------------------------------------------------------------
100% stocks
FIRECalc looked at the 117 possible 30 year periods in the available data, starting with a portfolio of $1,000,000 and spending your specified amounts each year thereafter.
Here is how your portfolio would have fared in each of the 117 cycles. The lowest and highest portfolio balance at the end of your retirement was $-931,017 to $8,509,297, with an average at the end of $2,691,022. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 8 cycles failed, for a success rate of 93.2%.
Of course 100% equities over a long period of time will out gain any other split, that is kind of beyond dispute as the numbers are pretty clear. So yeah a 25 year old is much better off being 100% in his/her 401.
it sure is worth it despite the fact you have studies like the above that was posted that says most should not be . financially they sure as heck should be .
there is little evidence that shows those that are gun shy have any better record staying the course in balanced funds . the investor returns are just as poor because of bad behavior
It's not a stock market crash that worries me. It's the crash of the US dollar, which is inevitable. The Trumpster's tax plan just accelerates the timetable.
as long as we are cherry picking exact lows why not cherry pick the exact highs and show that difference . since markets are typically up 2/3's of the time and down only 1/3 that would make more statistical sense .
in fact over a typical accumulation time frame which spans decades the difference between 60/40 and 100% equities on just adding 10k a year is over 1 million difference . that is not even the best time frame .
you are trying to cherry pick to prove a point that really make little actual sense.
who would ever be 100% stock drawing 5% in the first place with a 10 year time frame in the worst time frame since the great depression ? even so , you still have no idea how that would pan out in another 20 years from now over complete a 30 year retirement time frame . but i bet the 50/50 went bust drawing 5% before the 100% equities .
Last edited by mathjak107; 10-23-2017 at 12:32 PM..
The 15 yr dismal run with S&P 500 funds, starting around 1999, was indeed a bummer. It was that exact 15 yr period I happened to invest in an S&P Fund for my 1999 IRA, so I saw first-hand the poor performance in retrospect, when I took a look at it 15 years later, after literally ignoring it then completely forgetting I even had that IRA.
I like diversification, so I'll never have all my money in any one fund. Also, while forgetting you even have an account is amusing (and guaranteed you won't panic and sell if you don't even remember you have those monies), it's really best to remember and take a peek once in awhile.
Last edited by PJSaturn; 10-23-2017 at 02:42 PM..
Reason: Quoted post deleted.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
