Announcement

Collapse
No announcement yet.

Advice on my Asset Allocation - 100% Equity 0% Bonds

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • #16
    I’m pretty sure I’ll be comfortable living with a 2x-3x resident salary for the rest of my life. I just don’t care for that many expensive things, though I guess this could change as I get into my 40s. Most of our money goes to our kids right now, very little money actually goes to anything my wife or I want. The current theme of my IPS right now is to be as aggressive as possible b/c of my pension security in order to create the biggest asset cushion possible so that I have the potential to help my family and other people as I get older in .
    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

    Comment


    • #17
      I know it makes me sound old fashioned, but personally I still like to invest in bonds.  They have given me consistent returns for decades.  They reduce volatility.  For a young person with a pension and a high risk tolerance it isn't crazy to be 100% equity.  As a value investor it wouldn't be my choice.  Especially at the top of an 8 year bull market.  Changing from 90% to 100% doesn't increase your return necessarily, but it reduces diversification and increases volatility.  You will be fine decades from now whatever you choose as long as you save and invest.  Big picture is what counts.

      Comment


      • #18
        On its face, 100% stocks is not crazy if you are young and have a very high risk tolerance. I am not so sanguine about the future of equities so it is not for me and never has been, even when I was young, and even when I had (and I do have) a very high risk tolerance.

        But:

        - being 100% stocks and having $100k at risk is one thing. Good job staying the course in 08-09. But having $1,000,000 or $5,000,000 at risk is quite another. Watching $60,000 vanish in 18 months when you have a $200,000 earning potential is like a zit in the middle of your forehead: painful and annoying but ultimately meaningless. Losing $2.5 milliion when you are 20 years older and earning $250,000 is a more like malignant melanoma: potentially deadly. If you want to be 100% stocks now, it's not crazy; but establish - in writing - under what conditions of age, wealth, family status, etc, that you plan to transition to something less risky. And if you do not ever plan to do that, then yes - I think that's crazy. [of course there are a few for whom it is not crazy. and you might be one of them. but you're probably not. see below.] Many investors misjudge their true risk tolerance; you have the advantage of having been an investor in 08-09 but you had very little money at risk. Don't let that experience make you overconfident.

        - If you earn the full pension, it will provide a very nice floor of income. But the embedded 'if' is worth paying attention to. The pension program may change. Your desire to stay in the military may change. I agree with you that the odds of reneging on 20+ year veterans is close to zero so if you make it that far you are probably safe.

        - I disagree that the purpose of bonds is to provide insulation from volatility. If you have a high risk tolerance then who cares about volatility? I hold a lot of bonds (40%) but that is not why. I hold bonds because I am not optimistic about the long term returns of stocks at these price levels, especially US stocks. A 20-30 year period of low single digit real returns would not surprise me at all. A 20 year period of zero real return would not surprise me. A long term decline in the dollar coupled with a 20 year period of zero real return in US stocks would result in a decrease in real purchasing power. Because US stocks are already so aggressively priced, I think any series of bad events could easily result in very large losses which - unlike 2008-09 - do NOT reverse quickly. The worst lesson learned from 08-09 is that stocks always recover, and fast. They may recover - in some countries they haven't - but it certainly won't always be fast (witness the Great Depression). Bonds protect me from this, what I call 'deep risk'. That's the risk that stocks, just when I need them most, will go down and stay down. Now you may argue that the pension will be sufficient to live on but think carefully about whether that is really true, or just a pabulum you offer yourself to justify 100% stocks. Think carefully about your long term desires and unexpected expenses: supporting elderly or ailing parents or providing college expenses for your kids.

        - Certainly if someone is 100% stocks, then they must be globally diversified and I would argue at close to market weights (50% or more international). Taking 100% stock risk and taking most of that risk in just one country does qualify as crazy to me.

         

        good luck.

        Comment


        • #19


          A 20-30 year period of low single digit real returns would not surprise me at all. A 20 year period of zero real return would not surprise me. A long term decline in the dollar coupled with a 20 year period of zero real return in US stocks would result in a decrease in real purchasing power. Because US stocks are already so aggressively priced, I think any series of bad events could easily result in very large losses which – unlike 2008-09 – do NOT reverse quickly. The worst lesson learned from 08-09 is that stocks always recover, and fast. They may recover – in some countries they haven’t – but it certainly won’t always be fast (witness the Great Depression). Bonds protect me from this, what I call ‘deep risk’. That’s the risk that stocks, just when I need them most, will go down and stay down. Now you may argue that the pension will be sufficient to live on but think carefully about whether that is really true, or just a pabulum you offer yourself to justify 100% stocks. Think carefully about your long term desires and unexpected expenses: supporting elderly or ailing parents or providing college expenses for your kids. – Certainly if someone is 100% stocks, then they must be globally diversified and I would argue at close to market weights (50% or more international). Taking 100% stock risk and taking most of that risk in just one country does qualify as crazy to me.
          Click to expand...


          If I could make a required reading list for forum participants, this excerpt would be at the top of the list.
          Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

          Comment


          • #20
            [Apologies for the redundant posts, seems the server had some issue a few hours earlier.]

            Comment


            • #21
              Simple answer is, yes, your scenario warrants an 100% equity portfolio. Getting rid of the broad bonds is the right thing to do. But I have extra cents to throw on your AA.

               

              Is this your taxable account or tax exempted account? The discussion below assumes you have both and make as much contribution as you can to tax exempt accounts such as 401k, IRA, Roth IRA, etc, and also assume you have or will soon have non-trivial amount of money in your taxable accounts.

               

               

              First, REITs. It's better to move it your tax exempt accounts, because RETIs distributes pretty heavy dividend/income, which are taxed at the ordinary income tax rate. I assume your marginal tax rate is higher than the long term capital gain rate. For the same reason I'd suggest putting High Yield bond index fund in your tax exempt accounts. I know you don't want bonds due to lower long term returns, but High Yield is not too bad, it's somewhat like equity. It wouldn't lower your return by too much (doesn't by itself much less riskier either of course), but it's a good diversifier.

               

               

              Second, it's good that you have a mix of US and International equities, but I'd put international equities in taxable accounts, because most developed country governments, with UK being the biggest exception, take tax withhold on dividends paid to foreigner investors. For example, if your Switzerland stock pays you 2% dividend and they have a 35% withholding rate, then you are effectively losing 70bps on that part of your investment, and good luck filing papers to the Swiss government to beg the money back. If you have this in your taxable account, you can use this to offset the US capital gain tax, so largely speaking you wouldn't get hurt, but if you have foreign stocks/funds in your tax exempt accounts, then it'd be pure loss. I see you invest with Vanguard and have all index fund. You must hate paying fees (rightfully so!!). You wouldn't buy a fund that charges 70bps more fee than Vanguard does, would you?

               

              Attached is the same pdf file here: Withholding Tax Rates for Foreign Stock Dividends for 2017.

               

               

              Third, I'd challenge this "Equity will always rise faster long term and I will keep 100% equity" belief, which is also my belief but it's healthy to argue against oneself sometimes. What if US or entire world becomes Japan? If you invested in Japan for the past 20 years, the return is pretty much like a bond if not worse, and you still bear the fluctuation as any other equity. Human kind may have reached its peak or may have entered a super long low growth cycle - what if that's true, what if? Additionally, it's easy to keep 100% equity when you are young (aka. poor), and once you have 500K in your portfolio, a 8% down week sets you back 40K, hmm..., let's not think about that and stay strong!

               

               

              A final note, if you like low fee investment. I believe Schwab is the most aggressive in this regard nowadays. 3bps for US Broad and Large ETF, 5bps for US Small, 6bps for International and 7bps for REITs, no minimum investment requirement and commission for these Schwab ETFs. I love this trend in the industry.

              Comment

              Working...
              X