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foolish because while it is possible that your 89% stock portfolio will go back up after the next bear market, the psychology of a huge loss in retirement during a time you are drawing down your assets in 4% withdrawals will cause most people to panic during bear markets and sell at the bottom. With a 50-50 Stock- Bond-Cash portfolio your total losses will not be as high during the next bear market so most people will not panic and sell most of their stock portfolio.
(I understand that if you are able to ignore the news and not sell your 90% stock portfolio in long term you will come out fine, but most people will sell in a panic near the bottom in a bad bear market.)
Quote:
Originally Posted by davebarnes
We (ages 68.5/59.5) are:
89% "stocks" - combo of mutual funds: growth, growth+income, index.
10% "cash" - money market fund. This is equal to 3 years of expected annual withdrawals. Enables us to survive 3 years of a crappy market. I will probably increase this to a 4th year soon as recent portfolio gains give me flexibility.
1% "bonds" - mutual fund. I just don't get bonds when interest rates are so low. I suppose I could buy Venezuelan bonds for a higher return and exciting times.
I have played (for hours) with cfiresim and have found it to be useful (fun, even, but I am a nerd).
But, what I keep concluding is: keep working is the best move financially.
You don't need to be a great market timer in order to adapt your investments to changing conditions.
i have been doing that for 30 years with dynamic portfolio's so the relationship still holds . odds are you will still end up somewhere in between the high and low when the cycle completes still making the differences when spending down not great enough for the additional risk going higher than 40-60% equity .
it has been demonstrated over and over that things are very different when spending down and the results you think you should get from more and more equities reach a point of diminishing returns once the cycle completes .
foolish because while it is possible that your 89% stock portfolio will go back up after the next bear market, the psychology of a huge loss in retirement during a time you are drawing down your assets in 4% withdrawals will cause most people to panic during bear markets and sell at the bottom. With a 50-50 Stock- Bond-Cash portfolio your total losses will not be as high during the next bear market so most people will not panic and sell most of their stock portfolio.
(I understand that if you are able to ignore the news and not sell your 90% stock portfolio in long term you will come out fine, but most people will sell in a panic near the bottom in a bad bear market.)
there really is no data that shows bad investor behavior is any less if someone is risk averse .
as humans we hate losing money 3x greater than making it so down is down to many folks regardless . balanced funds show the same poor behavior as growth funds in the morningstar data
Yup and when my friends told me that they moved their portfolio from a equities heavier stance to a treasury stance I told them they just lost all of that money. Worst part was they still had years to go before they needed it.
in the accumulation stage i am all for 100% equities . for some retiree's they never leave that stage because their pensions support the lions share so for them the pay check never stopped .
if you have a pension that reduces your regular draw way down for all purposes you are not in the same category .
but for those dependent on their portfolio's for the lions share , the decumulation stage has added parameters that make very high equity positions appear nice and juicy in the first half of the game but they end up having a point of diminishing returns in the 2nd half .
that is why already you ran out of money with 100% equities more times than 50/50 did .
the terms and conditions of the game change once the additional layer of sequence risk hits .
the more down years you have , the greater your swings from peak to trough the greater effect sequence risk has and the more it reduces those juicy gains down to a point you could have hit anyway but with a smoother more direct ride as well as eliminating the biggest risk . that is poor performance the first 5 years in with excessively high equity positions.
poor performance day 1 while drawing 3-4% is akin to a trader having a string of losses day 1 before profits build a cushion .
so you cannot compare what constitutes a better strategy between someone predominantly dependent on their own resource's vs those with hefty pensions that cover the bulk .
in fact studies have shown the largest safe income draws and bigger balance over a wider range of outcomes for those rolling their own pension from their own resources is an integrated plan utilizing a spia , your own investing and tax free life insurance for a spouse .
someone with a decent pension that passes to a spouse already has that in place so all they need is their own investing and they can be on similar track ..
hind site is great when it was you that retired in to a bull . but those who retired in to 1965 ,1966 ,2000 with high equity positions can tell a different story in hind site .
so there are guidelines established to kind of get you in the sweet spot without as i said putting the carrot on the stick with additional money in equities that raise the stakes beyond what may be that point of diminishing returns .
Last edited by mathjak107; 06-05-2017 at 06:48 AM..
it is easy for someone who retired in to a bull to tell new retirees you should be 75-100% equity but if they are first retiring today , at these valuations and 9 years in to an expansion are they going to mirror the 2000 retiree or be luckier and mirror the 2009 retiree ?
no one knows . but in my opinion i would not exceed 50-60% if that portfolio was my main source of income . i find 50% works well for us as an upper limit .
the whole idea of finding a balance is no one wants to take pay cuts , not when working for our money and not when our money works for us . the only changes should be raises if things pan out better
If you retired on the first day of January 2000 ......
This is just a ridiculous straw man argument. How about picking 2009 instead. The outcome for 100% stocks would have been spectacular.
The second piece of ridiculous nonsense is selecting 100% allocation in stocks. Even at a younger age virtually no one would make that recommendation. Keeping some reserve to buy in if the market drops can pay off well. Some diversification does indeed protect against risk.
The third piece of ridiculous nonsense is the idea of keeping the same allocation indefinitely. A major idea of investing is to adjust assets and allocations based on trends and returns. Years ago bonds did well and a higher allocation made sense. Maybe those days will eventually return but not for the foreseeable future. Now with bond returns low you are almost as well off to stick some of your money in the mattress.
it isn't strawman in the sense either one can play out for a new retiree today . going in to excessively high in allocation can be far more damaging if you are wrong then the reward of being right
remember you were the one saying 40-60% equities are to low . you are basing it on hindsite from when you retired .
i was always 100% equities and never held bonds for the what if chance stocks fell . you end up giving up more in the accumulation stage trying to time things that way then letting it run at 100% .
stocks are typically only down 1/3 of the time so you would have to be real good at timing those buys to beat 100% equities over the long term .
this is why those who use bonds to mitigate temporary drops in the short term end up permanently hurting their long term returns . if a typical accumulation period is your time frame there is little logic in this
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