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Over the accumulation stage I would never use anything but 100% equities right up to maybe ten years before retirement
Quote:
Originally Posted by ddeemo
Same here but many invest closer to the conventional model of 70/30 - if the 20 years at $1000/mo was invested only in the S&P (SPY) the total would be $953K and if increased the amount contributed with inflation the total would be $1.18M - meet the goal. Big difference from the Target fund results.
Quote:
Originally Posted by mathjak107
As I say ,there is zero financial sense for long term investors to mitigate temporary drops using bonds and permanently hurting long term returns...
I disagree with the above. Mathjak & I have exchanged views on 100% equities a few times on this board; I haven't been able to convince him of my position, nor has he convinced me of his.
Even so, I'll lay out the argument for others to consider.
Mathjak correctly points out that over the long haul bonds will not ever equal the returns of stock... but in my view that is irrelevant. In my view the issue is returns-per-unit-of-risk, which Mathjak doesn't find compelling.
But others might be interested in Why Not 100% Equities by legendary investor Cliff Asness. He writes:
Quote:
In a 1994 article “College and University Endowment Funds: Why Not 100% Equities?” Richard H. Thaler [who subsequently won the 2017 Nobel Prize in Economics] 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:
A) long term investors such as University Endowments should take more risk than 60/40, and
B) 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.
Once you realize that
(A) the decision of how much risk to incur, and
(B) the construction of an optimal portfolio to achieve that level of risk,
are TWO separate and independent decisions, it is fairly straight forward to show that 100% equities is usually sub-optimal.
Look at the following chart:
Under some simple assumptions, an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Sharpe Ratio. This ratio is the portfolio's expected return less the risk-free rate, divided by the portfolio's standard deviation. Given this maximal Sharpe Ratio portfolio P, the investor then chooses the proper mixture of P and risk-less cash. This mix will vary from investor to investor because of different 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 chart presents some summary statistics for portfolios consisting of stocks and bonds from 1926 through 1993 (when the research was published; current calculations show much the same result). The compound returns show that equities dramatically outperform bonds, and clearly outperform the 60/40 portfolio.
This is NOT an apples-to-apples comparison, however. Stocks are more volatile than bonds and more volatile than the 60/40 portfolio.
Constructing a new portfolio makes the comparison more fair and more apples-to-apples.
Imagine an investor has already determined that (1) the 60/40 portfolio is the optimal portfolio of risky assets, and (2) the desired amount of risk is the same as a 100% stock portfolio (where risk means standard deviation). For a $1 investment, a new portfolio can be constructed by purchasing 20.0/12.9 = 1.55 dollars of the 60/40 portfolio, and financing this with 55 cents of borrowing. This is shown in the table as the "Levered 60/40."
An apples-to-apples (equivalent risk) portfolio of stocks and bonds outperforms a 100% equities portfolio over the 1926-1993 period. While a 100% stock portfolio grows to $800, 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 and borrowing (leverage) leads to an investment that grows to $1291 while the investor who owns 100% stocks bears the same level of risk, yet that portfolio only grows to $800.
So much for bonds being inappropriate for long-term investors.
A more recent article in Morningstar reviews the point in a bit more detail:
One Basket, One Egg
In 1994, two professors, Richard Thaler and J. Peter Williamson, asked the question: Why not put it all into stocks? Their query was more than a mere academic exercise, as the article, "College and University Endowment Funds: Why Not 100% Equities?," was published in a journal aimed at institutional investors, The Journal of Portfolio Management. The authors intended to be provocative, but they also believed they were raising a serious point.
For the most part, their effort earned hoots from financial advisors and the general press. The argument smacked of bull-market optimism; it seemed the sort of thing that cocky people wrote late in a market cycle. Besides, it wasn’t practical. Who could withstand the full, unalloyed impact of a stock-market crash? Not many of the advisors’ clients, nor the press’ readers, either.
On the other hand, the suggestion sure did work. A $10 million lump-sum investment placed into Ibbotson’s U.S. Large Company Stock Index on New Year’s Day 1995 would have ballooned to $65.5 million two decades later. For comparison’s sake, $10 million stashed in the Case-Shiller Los Angeles Home Price Index would have been worth less than half as much, at $29.8 million.
There were two very rough patches along the way. The all-stock portfolio slid from $36.5 million in summer 2000 to just over $20 million by September 2002. Even grimmer was the plunge from $42 million in late 2007 to $20.7 million in early 2009. The article assumes that with a time horizon of roughly forever and the financial flexibility to adjust spending, endowment managers would have stayed the course. Perhaps--but their discipline would certainly have been tested.
Still, thanks to quiescent inflation, the all-stock portfolio had a positive real rate of return throughout the 20-year period. Better yet, even at its 2009 nadir its value was far ahead of what the national home-price index had generated over the previous 15 years and fully competitive with the value of the top local markets: Seattle, San Francisco, and Los Angeles. When even the least-favorable results keep pace with San Francisco real estate, that is mighty fine performance indeed.
Before we congratulate the authors too heartily, it should be noted that in that particular 20-year period, almost all financial darts were winners. An all-stock portfolio was scarcely the only path to prosperity. For example, the Ibbotson Long-Term Corporate Bond Index also easily beat real estate, rising to just shy of $50 million. And, demonstrating the power of rebalancing, a 60/40 stock/bond blend gained almost as much as did the pure-stock portfolio, growing to $62.3 million.
In the Winter 1996 edition of The Journal of Portfolio Management, Cliff Asness of Goldman Sachs (who would later form his own hedge fund company, AQR) diverged from the general media’s complaint by accepting the all-stock portfolio’s risk. After all, endowment funds have a time horizon of roughly forever and, presumably, the discipline to shrug off short-term disappointments. So why shouldn't they aim higher than the traditional 60/40 balanced fund? Asness did not quarrel with that part.
However, he argued, the authors’ implementation could be improved. Two alternative portfolios would give significantly higher returns, at roughly similar levels of risk. The first suggestion was to retain the 100% equity position but to substitute Ibbotson’s U.S. Small Company Stock Index for its large-company version. The second and more ambitious version was to retain the 60/40 allocation, once again substituting small-cap stocks for blue chips, then to leverage that position by 55%.
Both portfolios performed fabulously--I suspect better than even Asness would have believed.
The 100% small company portfolio soared to $96.5 million. While the 2008 market crash hurt it even more than the original large-cap portfolio, in percentage terms, it fell from a higher place, so that it bottomed in 2009 at $25 million rather than the large-company portfolio’s $20 million. And it largely dodged the previous 2000-02 bear market, which mostly affected the giant tech companies. By any reasonable measure, the 100% small company portfolio outperformed the original, large-company version.
The leveraged portfolio was even more spectacular, checking in at $117.5 million. A 12-bagger in a mere 20 years! For a basket of securities, rather than a single (and fortunate) stock! The going does not get any better than that. In addition, the portfolio avoided significant losses except for the 2007-09 time period, where both in percentage terms and in the dollar amount at its low point, it bested all tested alternatives--both flavors of 100% stock portfolios, the unleveraged 60/40 balanced portfolio, and the all-bond portfolio.
We own our retirement home outright. That was my “requirement” and ask of my spouse. NO MORE MORTGAGES. We sold our home in one state and moved here to California. Thankfully, the housing market where we sold was on fire - and we sold our home for well over asking. We owned that home outright. That plus a little from our family inheritance and we had what we needed to buy in rural CA. NOT in any major metro area.
The property taxes in California are more than we have ever paid - more than 3 and a half times what we paid in our former state. But we have no house payment. If you break down the property tax to a monthly sum - it’s not more than we paid monthly for the mortgage for our prior home. Really easy to budget.
No matter where you retire…. If you can own your home outright - that is a security that cannot be taken from you.
It is still kind of sad when you even equate property tax with mortgage in the same sentence. Property tax should't be close to mortgage.
Now, I realize there are many factors. Your mortgage could be year 29 on a 30 year loan, so the mortgage seems tiny today vs. closing 29 years ago. You could also upgrade to a far pricier property.
Still, when I read your property tax is not more than your former mortgage, I still cringed. It just sounds so wrong.
I disagree with the above. Mathjak & I have exchanged views on 100% equities a few times on this board; I haven't been able to convince him of my position, nor has he convinced me of his.
Even so, I'll lay out the argument for others to consider.
Mathjak correctly points out that over the long haul bonds will not ever equal the returns of stock... but in my view that is irrelevant. In my view the issue is returns-per-unit-of-risk, which Mathjak doesn't find compelling.
But others might be interested in Why Not 100% Equities by legendary investor Cliff Asness. He writes:
Once you realize that
(A) the decision of how much risk to incur, and
(B) the construction of an optimal portfolio to achieve that level of risk,
are TWO separate and independent decisions, it is fairly straight forward to show that 100% equities is usually sub-optimal.
Look at the following chart:
Under some simple assumptions, an investor chooses a portfolio of risky assets (in this case stocks and bonds) to maximize the portfolio's Sharpe Ratio. This ratio is the portfolio's expected return less the risk-free rate, divided by the portfolio's standard deviation. Given this maximal Sharpe Ratio portfolio P, the investor then chooses the proper mixture of P and risk-less cash. This mix will vary from investor to investor because of different 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 chart presents some summary statistics for portfolios consisting of stocks and bonds from 1926 through 1993 (when the research was published; current calculations show much the same result). The compound returns show that equities dramatically outperform bonds, and clearly outperform the 60/40 portfolio.
This is NOT an apples-to-apples comparison, however. Stocks are more volatile than bonds and more volatile than the 60/40 portfolio.
Constructing a new portfolio makes the comparison more fair and more apples-to-apples.
Imagine an investor has already determined that (1) the 60/40 portfolio is the optimal portfolio of risky assets, and (2) the desired amount of risk is the same as a 100% stock portfolio (where risk means standard deviation). For a $1 investment, a new portfolio can be constructed by purchasing 20.0/12.9 = 1.55 dollars of the 60/40 portfolio, and financing this with 55 cents of borrowing. This is shown in the table as the "Levered 60/40."
An apples-to-apples (equivalent risk) portfolio of stocks and bonds outperforms a 100% equities portfolio over the 1926-1993 period. While a 100% stock portfolio grows to $800, 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 and borrowing (leverage) leads to an investment that grows to $1291 while the investor who owns 100% stocks bears the same level of risk, yet that portfolio only grows to $800.
So much for bonds being inappropriate for long-term investors.
A more recent article in Morningstar reviews the point in a bit more detail:
Meh …a total market fund or s&p fund over decades is not risky , it is volatile ..it still makes no financial sense mitigating temporary dips with decades to go.
We can cherry pick the outlier time frames where perhaps an asset class that typically does not , pulls a head but ,betting on the exceptions is not smart. .
Right now gold beat equities the last 20 years …so if I want to prove an exception it’s easy to do.
The chart you posted includes the lost decade for equities and only a few years where it wasn’t so if I was going to cherry pick why not equities I certainly would mold my time frame around the lost decade, Or the 20 years back in the 1960s
We know so many who dumped every extra penny in to getting rid of the mortgage faster ..now they have more than I would call healthy tied up in their house and a reduced retirement income from a less than pile of liquid assets then they really should have ended up with .
Now any extra they invest has a lot of pressure on a shorter time frame to do well …
The most precious resource we have when it comes to investing elsewhere is time ….by delaying putting more in to those investments until that mortgage was paid they left themselves with a much shorter time frame.
A lost decade could leave them in a real bind and has .
Two of our friends did just that …now it ended up despite a paid mortgage they could not afford to live here .
So they had to leave family and friends for florida and now regret not doing things a lot differently.
Priorizing paying off a mortgage at the expense of the pool of money that will end up supporting you is not a wise thing either
When you simultaneously have (A) a mortgage, and (B) liquid investments (stock, bonds)
you are employing leverage.
I did buy last spring, made about 25%, got out when the S&P was around 3600. Yeah - I left money on the table versus today's valuations. I don't care. Other investors can party in the casino in my place.
Portfolio visualizer goes back to 1987 with the us bond index so let’s compare to a 60/40 over some typical periods
10k invested in both the us stock market vs us stock market and 40% us bond market .
Below is per 10k invested so we are talking pretty substantial differences as the portfolio gets larger .
1987-2021
100% equities grew to 349,454 …60/40 205,442..over the same time frame the fidelity insight growth model which I used through my accumulation years had 10k grow to 500k
1990 to 2021
100% Equities 226,573 , 60/40 145,022
1995 to 2021
100% Equities 151,219. 60/40 98,059
2000 to 2021
100% equities 46,052 , 60/40 40,799
2005 to 2021
100% equities 49,515 , 60/40 35,978
2010 to 2021
100% equities 47,317 , 60/40 30,626
2015 to 2021
100% equities 22,964 , 17,996.
Today there are leveraged funds one can use but they can be very very tricky to understand and use over the long term …personally I would stay away from introducing them in to my core.
So with no short term dips to mitigate 100% equities in diversified funds is the only thing I ever would recommend to those with decades to go .
Other portfolio allocations and strategy is for after you accumulated as much as you could and now need to worry about mitigating those dips over the shorter term
Last edited by mathjak107; 06-06-2021 at 12:22 PM..
Meh …a total market fund or s&p fund over decades is not risky , it is volatile ..it still makes no financial sense mitigating temporary dips with decades to go.
We can cherry pick the outlier time frames where perhaps an asset class that typically does not , pulls a head but ,betting on the exceptions is not smart. .
Right now gold beat equities the last 20 years …so if I want to prove an exception it’s easy to do.
The chart you posted includes the lost decade for equities and only a few years where it wasn’t so if I was going to cherry pick why not equities I certainly would mold my time frame around the lost decade, Or the 20 years back in the 1960s
As I said in my post, you and I understand one another, and disagree: you don't find my view any more compelling than I find yours. That's OK; reasonable people can and do disagree on things.
One question: above you say "a total market fund or s&p fund over decades is not risky , it is volatile".
Can you explain your view a bit more? I ask because in my mind volatility ≡ risk and risk ≡ volatility.
As I said in my post, you and I understand one another, and disagree: you don't find my view any more compelling than I find yours. That's OK; reasonable people can and do disagree on things.
One question: above you say "a total market fund or s&p fund over decades is not risky , it is volatile".
Can you explain your view a bit more? I ask because in my mind volatility ≡ risk and risk ≡ volatility.
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