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

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  • The Wall Street Doctor
    replied
    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.

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  • The Wall Street Doctor
    replied
    [Apologies for the redundant posts, seems the server had some issue a few hours earlier.]

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  • CM
    replied


    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.

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  • FIREshrink
    replied
    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.

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  • WealthyDoc
    replied
    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.

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  • CM
    replied
    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 .

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  • frog
    replied
    Thanks to everyone for their thoughts and comments. I'm sorry for the late response ... residency life got in the way.





    Current Asset Allocation (90% Equity / 10% Bonds): 45% Vanguard Total Stock Market Index Fund 20% Vanguard Small-Cap Value Index Fund 15% Vanguard Total International Stock Index Fund 10% Vanguard REIT Index Fund 10% Vanguard Total Bond Market Index Fund



    Proposed Asset Allocation (100% Equity): 40% Vanguard Total Stock Market Index Fund 20% Vanguard Small-Cap Value Index Fund 20% Vanguard Total International Stock Index Fund 20% Vanguard REIT Index Fund
    Click to expand…


    I don’t think it’s unreasonable to forego bonds in your allocation, but also wonder how much you had invested in 2008? I also handed 2008 without panicking. I only had $4000 invested all in stocks, but, boy, did I handle it well.

    I agree with the recs to not double your REIT contribution to 20%. I would bump TISM up to 30% instead if you want to stick with 4 funds.
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    My portfolio was as high as 100K in 2008 and then dipped to about 30-40K.




    You are getting a lot of anonymous cheerleading for a 100% stock allocation.  I would encourage you, again, to read some about not going 100% before you decide.  I would look at Graham’s, The Intelligent Investor.  He discusses people who could consider it, do you fit?  He also discusses when it would be tactically appropriate, is it now?  I purposefully don’t answer these questions for you because they depend on your answer for yourself.  I would also look at Roth’s, The Great Depression: A Diary.  I find it useful to purposefully seek out opposite views to mine to help solidify my decisions.  So, not saying you shouldn’t go 100%, just that you should actively research reasons not to go 100% and be sure you are okay with them.  Good luck.  Best wishes.  And, thank you for your service to our country!
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    Thanks for the book suggestions! Graham's book has been on my reading list for a while, I'm hoping to get to it one day. I'll your other suggestion by Dimson and Roth to the list as well.







    You are getting a lot of anonymous cheerleading for a 100% stock allocation.  I would encourage you, again, to read some about not going 100% before you decide.  I would look at Graham’s, The Intelligent Investor.  He discusses people who could consider it, do you fit?  He also discusses when it would be tactically appropriate, is it now?  I purposefully don’t answer these questions for you because they depend on your answer for yourself.  I would also look at Roth’s, The Great Depression: A Diary.  I find it useful to purposefully seek out opposite views to mine to help solidify my decisions.  So, not saying you shouldn’t go 100%, just that you should actively research reasons not to go 100% and be sure you are okay with them.  Good luck.  Best wishes.  And, thank you for your service to our country!
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    My advice is worth what you pay for it so take it with a grain of salt. The pension theoretically provides you with a backup so you can be more aggressive. However, with a country 20T in debt and growing, I don’t know if I would rely on a pension for security. Just look at the Dallas police pension and that is just the tip of the iceberg. If you really want to go 100% in equities, you won’t lose much by just waiting a year with your current plan to see if it really is for you. Track what a 100% equity position will be over the year and see if the returns are what you want and if you can stomach the volatility (also note the volatility is artifically suppressed right now but probably not for long IMHO). For full disclosure, I have no classic equity position (except for 10% position in a specific industry) even though every piece of investing literature says I should. If the market drops by 60-80% and the CAPE is < 9, at that point I will be nearly 100% equities but until that time happens, I plan to do other things or try to balance the risk/rewards of my equity exposure.

    And I second Roth’s book. Very insightful and contains important investing advice written by a non-expert. Graham would probably argue 25% equities at this time for an average investor IMHO but then again I wonder if he would be offended by today’s market valuations and recommend something even lower. After all, based on one of his ways to estimate intrinsic value, a non-growth company should have a P/E of ~8.
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    My thoughts on the current military pension system is that it's completely unsustainable into the future (especially since the average human life span is getting so high) if we don't make some changes soon. If that does happen, I would expect the government to grandfather any veterans who have already committed to 20+ years to a military pension. I can't imagine the backlash this country would get if the government nulled all existing military pensions, but I suppose it's a possibility. I see the value in your point of not relying on anyone but yourself though.




    In your situation, 100% equities isn’t completely unreasonable.  It seems the basis of your argument is that the pension is a near certainty (which some may debate) thus allowing you to take more risk.  However, you also mention that this pension would be enough for you live off of, though it’s not clear if you meant you could cover 100% of you expenses indefinitely with the pension alone, or that the pension would only cover some expenses and/or occasionally all expenses in a down market.  Nevertheless, an alternative investing idea could be the exact opposite of what you propose, minimize your equity exposure, limit your risk and volatility, as you may not need the equity exposure for the “heavy lifting” of your portfolio to meet your number.  Essentially, you’ve nearly “won” the game, with a high physician income, healthy savings, and low but safe investment return over the next X years, you could just pad your pension and still come out with a healthy retirement income while taking on less risk.
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    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 life.

    Leave a comment:


  • fasteddie911
    replied
    In your situation, 100% equities isn't completely unreasonable.  It seems the basis of your argument is that the pension is a near certainty (which some may debate) thus allowing you to take more risk.  However, you also mention that this pension would be enough for you live off of, though it's not clear if you meant you could cover 100% of you expenses indefinitely with the pension alone, or that the pension would only cover some expenses and/or occasionally all expenses in a down market.  Nevertheless, an alternative investing idea could be the exact opposite of what you propose, minimize your equity exposure, limit your risk and volatility, as you may not need the equity exposure for the "heavy lifting" of your portfolio to meet your number.  Essentially, you've nearly "won" the game, with a high physician income, healthy savings, and low but safe investment return over the next X years, you could just pad your pension and still come out with a healthy retirement income while taking on less risk.

    Leave a comment:


  • Kamban
    replied


    Assuming I can faithfully stay the course with my 100% stock allocation (I remained invested through the 2008 recession), am I crazy for having this aggressive of a portfolio allocation? I feel that my military pension gives me the room to stay aggressive for at least the next 30 years.
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    Things that go in your favor are that you are young, you promise to not tough the stocks for>20 years and have a military pension at the end of 10+ years from now. After 20 years of holding it stocks have outperformed bonds and it you can believe in that you should be OK. You can always earn as a PP physician or hosp employed after you get out from the military and allocate some of that income to a different area, should you wish.

    I am also 100% invested in stocks though that sector makes up only 30% of my wealth.

    Leave a comment:


  • Dr. Mom
    replied
    You are getting a lot of anonymous cheerleading for a 100% stock allocation.  I would encourage you, again, to read some about not going 100% before you decide.  I would look at Graham's, The Intelligent Investor.  He discusses people who could consider it, do you fit?  He also discusses when it would be tactically appropriate, is it now?  I purposefully don't answer these questions for you because they depend on your answer for yourself.  I would also look at Roth's, The Great Depression: A Diary.  I find it useful to purposefully seek out opposite views to mine to help solidify my decisions.  So, not saying you shouldn't go 100%, just that you should actively research reasons not to go 100% and be sure you are okay with them.  Good luck.  Best wishes.  And, thank you for your service to our country!

    Leave a comment:


  • WallStreetPhysician
    replied




    Hi everyone, I’m looking for some feedback about a portfolio allocation I am thinking of committing myself to. I already have an aggressive asset allocation (90%equity/10%bonds) but I’m thinking of getting rid of my bonds and going 100% equity.

    Background:
    I am young (low 30s), a PGY-1 in EM, debt-free with a decade commitment to the military (I already have 14 years of active service). Assuming an average military promotion cycle, I’ll leave the military in my late 40s with an annual pension in the 60-80K range (2017 dollars) with good health benefits.

    Current Asset Allocation (90% Equity / 10% Bonds):
    45% Vanguard Total Stock Market Index Fund
    20% Vanguard Small-Cap Value Index Fund
    15% Vanguard Total International Stock Index Fund
    10% Vanguard REIT Index Fund
    10% Vanguard Total Bond Market Index Fund

    Proposed Asset Allocation (100% Equity):
    40% Vanguard Total Stock Market Index Fund
    20% Vanguard Small-Cap Value Index Fund
    20% Vanguard Total International Stock Index Fund
    20% Vanguard REIT Index Fund

    I have put a lot of thought into my aggressive asset allocation, and while very controversial, I came to the conclusion that because I’m young, will have a decent pension with health benefits that I can live on for the rest of my life (and thus weather volatile markets in retirement age), that I don’t need bonds. To me, the benefit of “smoothing” out the volatility of the stock market with bonds isn’t as important because I’m in my accumulation phase, won’t be touching my portfolio for at least 30 years, and have a generous military pension. I’d rather have the historically increased returns stocks have provided over bonds. I understand that past performance does not guarantee future results, but I think over a long-enough time horizon (30+ years), the probability of bonds outperforming stocks is very low.

    Assuming I can faithfully stay the course with my 100% stock allocation (I remained invested through the 2008 recession), am I crazy for having this aggressive of a portfolio allocation? I feel that my military pension gives me the room to stay aggressive for at least the next 30 years. I presume when I do come close to tapping into my retirement 30+ years from now, that I would start allocating a percentage of my portfolio to bonds.

    Any comments are appreciated.
    Click to expand...


    Go for it. With your military pension, it sounds like you're investing with money you can afford to lose. I would be aggressive, keeping in mind that a more aggressive portfolio (especially the tilt towards small-cap value) does not guarantee a better return, even in the long-run. It does guarantee more volatility, which you've proven you can handle.

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  • nachos31
    replied


    Current Asset Allocation (90% Equity / 10% Bonds): 45% Vanguard Total Stock Market Index Fund 20% Vanguard Small-Cap Value Index Fund 15% Vanguard Total International Stock Index Fund 10% Vanguard REIT Index Fund 10% Vanguard Total Bond Market Index Fund

    Proposed Asset Allocation (100% Equity): 40% Vanguard Total Stock Market Index Fund 20% Vanguard Small-Cap Value Index Fund 20% Vanguard Total International Stock Index Fund 20% Vanguard REIT Index Fund
    Click to expand...


    I don't think it's unreasonable to forego bonds in your allocation, but also wonder how much you had invested in 2008? I also handed 2008 without panicking. I only had $4000 invested all in stocks, but, boy, did I handle it well.

    I agree with the recs to not double your REIT contribution to 20%. I would bump TISM up to 30% instead if you want to stick with 4 funds.

    Leave a comment:


  • frog
    replied




    Remember Vanguard Total Stock Market includes REIT’s as a sector now.  Are you taking that into account with your 20% REIT allocation?


    Good point, I did not consider that. Based on the Bogleheads Wiki, only 1.72% of the Vanguard TSM portfolio is composed of REITs, so for simplicity's sake I probably won't take that too much into consideration.




    I like it.

    You may also consider an allocation to international small caps, via Vanguard VSS. Lower correlation to the rest of your portfolio.

    You could also consider just swapping from total bond to a long term bond index. You wouldn’t be sacrificing much in returns and would further add diversification.

    Finally, decide if you are sold on any of the other “newer factors” such as momentum and profitability. These are now theoretically capturable with low cost ETFs and could further diversify your portfolio.

    For a young, sleeps well at night, investor who wanted 90-100% equity, I might do:

    20% VTSAX (VG Total US)
    10%. VTIAX (VG Total International)
    20%. VG or DFA Small Cap Value
    10% VSS (VG International Small)
    20% VG REIT and other crowd sourced real estate
    10% Momentum fund (maybe MTUM)
    10%. VG Long term bond index fund
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    Thanks for the VSS suggestion. I thought about it but there seems to be something very beautiful to me about the simplicity of only having 4 different funds (adding VSS would make a total of 5 funds). It's a good suggestion and something I'll look into again.

    I had no idea there were ETFs that focused on momentum. The ER is pretty good too at 0.15. Thanks for the suggestion. I don't know much about momentum investing, but it's something to consider reading about. I can't imagine I would ever allocate more than 5% to something like a momentum fund. I'd probably treat it as "play money."




    I agree that 100% stocks is ok since you did not panic in 2008 and you are young.  I would keep the reits at 10% and increase the vtiax to 25%.  It has some emerging market in it.  The only kink in the plan would be burnout and quitting the military prior to 20 years.  My father and nephew stayed in for 20 (they were not docs).  They both found civilian jobs and retired nicely.
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    Alas, I already have 14 years of service and have a mandatory obligation to serve 10 years. I will be leaving the military with at least 23 years of service at a minimum. Fortunately (or unfortunately), quitting the military before my pension kicks in isn't an option.




    The OP remained invested in 2008, but if he/she is early 30s PGY1 now, was he/she an early 20s college student in 2008? That was probably a very small portfolio, and many early 20s students feel invincible and virtually immortal.

    The response might be different when he/she is 45 with a large portfolio and a late 40s retirement goal.

    Frog, ask yourself how many young Japanese investors would have proposed a similar plan during the late 1980s, and how many would propose it now?
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    I was an enlisted service member in my mid 20's in 2008 (I enlisted right after high school, I didn't go to undergrad until my mid-to-late 20s).

    I suppose a Japanese investor that remained solely invested in Japanese domestic stocks over the last stagnant decades would have a poor outlook on 100% equities. My thought process for my proposed allocation was that with continuous dollar-cost averaging (monthly investments), broad diversification (my TISM, REITs, albeit zero bonds), if what happened to the Nikkei happened to the US market, I wouldn't be in as bad a shape as said Japanese investor. I see your point though that a small bond allocation would only make me more diversified.







    …(I remained invested through the 2008 recession), am I crazy for having this aggressive of a portfolio allocation?
    Click to expand…


    A lot of people who think they can handle a 100% equities portfolio don’t know their true tolerance for risk, because they’ve never been through a serious bear market.  You have, and you weathered it well.  So I’d say for now that 100% equities is fine.  But don’t forget to re-evaluate things every 5-10 years; you may find that as your age goes up and your portfolio grows in value, big drops that left you unfazed when you were younger and knew you had plenty of time to recover will make you increasingly nervous.
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    Good point. It's important to note that in 2008 I was single (I now have 3 kids) and my portfolio was not in any way diversified with passive funds as it is now. I think my portfolio in 2008 had about 10 different hand picked stocks that were chosen based on how much I liked the products those companies created. It was very dumb and irresponsible. Aside from low fees, the biggest benefit I've gained from passive index funds is the time I've gained from not looking at my portfolio frequently and the stress of not having to time when to enter/exit a stock position.

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  • artemis
    replied


    ...(I remained invested through the 2008 recession), am I crazy for having this aggressive of a portfolio allocation?

    Click to expand...


    A lot of people who think they can handle a 100% equities portfolio don't know their true tolerance for risk, because they've never been through a serious bear market.  You have, and you weathered it well.  So I'd say for now that 100% equities is fine.  But don't forget to re-evaluate things every 5-10 years; you may find that as your age goes up and your portfolio grows in value, big drops that left you unfazed when you were younger and knew you had plenty of time to recover will make you increasingly nervous.

    Leave a comment:


  • CM
    replied
    The OP remained invested in 2008, but if he/she is early 30s PGY1 now, was he/she an early 20s college student in 2008? That was probably a very small portfolio, and many early 20s students feel invincible and virtually immortal.

    The response might be different when he/she is 45 with a large portfolio and a late 40s retirement goal.

    Frog, ask yourself how many young Japanese investors would have proposed a similar plan during the late 1980s, and how many would propose it now?

    Leave a comment:

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