Talk me out of changing AA to 50% stocks

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AerialWombat
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Talk me out of changing AA to 50% stocks

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David Jay
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Re: Talk me out of changing AA to 50% stocks

Post by David Jay »

I am not going to try to talk you out of it. If you did not suffer emotional distress in March of 2020, that is a good indication that you can move your AA a bit higher. AA between 75/25 and 25/75 is primarily a behavioral question.
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Re: Talk me out of changing AA to 50% stocks

Post by sport »

OP, you may get better responses if you include your age and when you plan to retire. These can be important when deciding on an AA.
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Re: Talk me out of changing AA to 50% stocks

Post by random_walker_77 »

While increasing your stock asset allocation when the market is near a peak is usually the wrong time to do it, one could argue that you're just shifting some funds from a highly concentrated equity position in a single business to the overall stock market. Asset allocation should be considered over your entire holdings and not just a subset. So you're not really increasing your exposure to equities and are instead substantially increasing your diversification.

Though you didn't phrase it this way, it sounds like you want to go to 33% stocks, 33% bonds, and 33% real estate?
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Re: Talk me out of changing AA to 50% stocks

Post by retiredjg »

I won't try to talk you out of it as it seems that your willingness to take risk has changed. And last March is recent enough to remember if it bothered you.

That said, I think moving from 30% to 50% is a big jump. But the other argument is that the 50% would still only be 33% of your wealth...so maybe it's ok. :happy
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Re: Talk me out of changing AA to 50% stocks

Post by pkcrafter »

I began retirement at 30% stock and discovered it wasn't enough to keep up with withdraws and inflation. I went to 40% stock and it's been fine with a normal withdrawal rate of 3-3.5%

Paul
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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

Post by David Jay »

Your long retirement horizon also favors a higher stock allocation.
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Re: Talk me out of changing AA to 50% stocks

Post by Marseille07 »

50/50 seems fine to me. A very solid & safe allocation.
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Re: Talk me out of changing AA to 50% stocks

Post by peddler12 »

pkcrafter wrote: Tue Mar 23, 2021 11:04 am I began retirement at 30% stock and discovered it wasn't enough to keep up with withdraws and inflation. I went to 40% stock and it's been fine with a normal withdrawal rate of 3-3.5%

Paul
Paul, I would also like to thank you for this post. I'm 7 years away from retirement, and currently my AA is 50/50. I believe your 40/60 AA will be excellent and appropriate for my retirement years. Thank you.
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Re: Talk me out of changing AA to 50% stocks

Post by Vanguard Fan 1367 »

I think that with bond yields in the toilet that your 50 50 plan is reasonable. In the old days I should have been at 70 % bonds. I am at 30% bonds and 70% stocks.
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Re: Talk me out of changing AA to 50% stocks

Post by Paradise »

Wouldn't talk you out at all.

I think that 60/40 stock/bond is the most conservative that I'd ever go at any point in my life, so to me, between 100/0 and 60/40 is the behavioral question.

The concept of equities crashes are overblown. In the last 50 years, in 98% of all days the stock market was within 15% of the 52 week high. 95% of the time it has been within 10% of the 52 week high. 85% within 5%

Sure, there have been some major crashes, but if you spend too much time preparing for those unlikely events, you've lost a lot of principal accumulation along the way which would have netted you ahead even through a major crash.

Put another way, you may only drop 10% in a major crash vs a guy with 100% stock losing 40%, but he likely would have been up many times more than you going into that same period. If he is up even only double your gains up to that point, he still wins.
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Re: Talk me out of changing AA to 50% stocks

Post by averagedude »

I adhere to the rule that you should never increase your asset allocation when markets are at all time highs (especially 20%), and you should never lower your asset allocation after markets crash. The time to have changed your AA was last March when the market tumbled 35%, not when the stock market is in a 12 year run of compounding of over 15% and stock valuations are near historic high valuations. Be greedy when others are fearful, and be fearful when others are greedy. You will have another opportunity in your lifetime when the markets crash, participants in the market are fearful, and gloom and doom is rampant. If you do decide to change your AA to 50/50, write it down in an investment policy statement and stick to it.
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Re: Talk me out of changing AA to 50% stocks

Post by Leif »

Your timing is suspect. But, I don't have an issue with your 50/50. I'm 50/50 myself since retirement. How did you handle the 08-09 GFC?

If you have plenty of bonds to handle a 10 year draught in equities with your new AA then it sounds reasonable. If it was me I would probably value average over a couple of years. No rush.
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Re: Talk me out of changing AA to 50% stocks

Post by Broken Man 1999 »

I think a 50/50 AA for your portfolio of stocks and bonds is pretty conservative. Overall 33/33/33 should work very well for you.

DW and I started "retirement" at age 62 in 2015, with a 50/50 portfolio of our equities and bonds. I also used a large influx of cash to set up our retirement portfolio, mine was from a lump-sum pension. Before I added more bonds with the lump-sum money, we were about 80% equities, 20% bonds. Nice not having to sell equities to buy bonds.

Because of mostly smooth sailing from 2015 till 2020, I upped our equities to 55%, bonds at 45%. We have banked many extra years of expenses with the strong market. I had tentatively planned to do increases in equities at five year intervals, but the strong market along with the bond holdings increase via rebalancing made the increased equity allocation in 2020 a no brainer.

Sounds like you can cash flow from your rentals your expenses, and let the other two 33% portions grow.

As others have mentioned, equities are near ATHs, But, on the other hand, given your age, you have decades for the equities to grow. And, with your cash flow from rentals, I suspect in the coming decades you will get opportunities to buy equities experiencing declines.

Enjoy, you are in a great place, especially considering the hard times you went through in years past.

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Re: Talk me out of changing AA to 50% stocks

Post by JBTX »

I think 1/3 stocks is overly conservative for a 40 year old. With a +/- 50 year retirement, depleting your portfolio is as much as a risk as short term losses. Personally I would probably take a non Boglehead approach and phase my way in, especially if there is a material downturn where I could jump in.
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Re: Talk me out of changing AA to 50% stocks

Post by 000 »

How much in international stocks?
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Re: Talk me out of changing AA to 50% stocks

Post by CoAndy »

Can I talk you into moving from 30-70 to 40-60?
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Re: Talk me out of changing AA to 50% stocks

Post by MotoTrojan »

I would be terrified to be 30/70. Moving to at-least 50% seems prudent, and make sure you have ex-US stocks too.

I can't think of any situation where I am <=50% equities. 60% is probably my floor, but more likely 70%.
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Re: Talk me out of changing AA to 50% stocks

Post by finite_difference »

Marseille07 wrote: Tue Mar 23, 2021 12:54 pm 50/50 seems fine to me. A very solid & safe allocation.
+1.
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Re: Talk me out of changing AA to 50% stocks

Post by PowderDay9 »

AerialWombat wrote: Tue Mar 23, 2021 12:46 pm You're spot on, all the way around. I'm replacing private equity in a tech startup with an index fund.
Seems completely reasonable. No need to talk you out of 50/50. That's a great AA.
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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

Post by Beensabu »

AerialWombat wrote: Tue Mar 23, 2021 10:34 am I'm early 40's and already semi-retired. I am unlikely to ever 100% "retire", under the generally accepted Internet Retirement Police definition of the word. Barring disability or some other unforeseeable occurrence, I am most likely to forever continue generating more active income than I need, even working the proverbial 4-Hour Workweek.

In other words, the most realistic use of my retirement portfolio is actually having it in lieu of disability or long-term care insurance.
You're able to take risk, and you don't need to. Best possible place to be. Good for you.

So.

Do you want to?

It sounds like it doesn't really matter what you decide. Do what makes you happy.
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Re: Talk me out of changing AA to 50% stocks

Post by staustin »

averagedude wrote: Tue Mar 23, 2021 3:20 pm I adhere to the rule that you should never increase your asset allocation when markets are at all time highs (especially 20%), and you should never lower your asset allocation after markets crash. The time to have changed your AA was last March when the market tumbled 35%, not when the stock market is in a 12 year run of compounding of over 15% and stock valuations are near historic high valuations. Be greedy when others are fearful, and be fearful when others are greedy. You will have another opportunity in your lifetime when the markets crash, participants in the market are fearful, and gloom and doom is rampant. If you do decide to change your AA to 50/50, write it down in an investment policy statement and stick to it.
Excellent post.
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Re: Talk me out of changing AA to 50% stocks

Post by watchnerd »

averagedude wrote: Tue Mar 23, 2021 3:20 pm I adhere to the rule that you should never increase your asset allocation when markets are at all time highs (especially 20%), and you should never lower your asset allocation after markets crash. The time to have changed your AA was last March when the market tumbled 35%, not when the stock market is in a 12 year run of compounding of over 15% and stock valuations are near historic high valuations. Be greedy when others are fearful, and be fearful when others are greedy. You will have another opportunity in your lifetime when the markets crash, participants in the market are fearful, and gloom and doom is rampant. If you do decide to change your AA to 50/50, write it down in an investment policy statement and stick to it.
Ditto.

I actually reduced my stock allocation by 10% (from 70% to 60%) in February for valuation reasons, per my IPS.

Orthodox Bogleheads will call it market timing (it is, at a soft level), but I view it as an assessment of probabilities of future stock returns at current prices.
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Re: Talk me out of changing AA to 50% stocks

Post by qwertyjazz »

It matters how you handle the 1/3 not index fund not bond portion and the relative amounts compared to your spending level.
How likely are you to find a risky concentrated investment that you will want to take more risk in?
How many years of living expenses does your current fixed income represent and proposed fixed income?

You should consider your investments in total and not just bonds and index funds to consider how to balance them.
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Re: Talk me out of changing AA to 50% stocks

Post by zuma »

watchnerd wrote: Wed Mar 24, 2021 7:36 am
averagedude wrote: Tue Mar 23, 2021 3:20 pm I adhere to the rule that you should never increase your asset allocation when markets are at all time highs (especially 20%), and you should never lower your asset allocation after markets crash. The time to have changed your AA was last March when the market tumbled 35%, not when the stock market is in a 12 year run of compounding of over 15% and stock valuations are near historic high valuations. Be greedy when others are fearful, and be fearful when others are greedy. You will have another opportunity in your lifetime when the markets crash, participants in the market are fearful, and gloom and doom is rampant. If you do decide to change your AA to 50/50, write it down in an investment policy statement and stick to it.
Ditto.

I actually reduced my stock allocation by 10% (from 70% to 60%) in February for valuation reasons, per my IPS.

Orthodox Bogleheads will call it market timing (it is, at a soft level), but I view it as an assessment of probabilities of future stock returns at current prices.
You might be right. Or not.

If 50/50 is the desired allocation, I would not wait for a market crash before making the change.
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Re: Talk me out of changing AA to 50% stocks

Post by gips »

watchnerd wrote: Wed Mar 24, 2021 7:36 am Ditto.

I actually reduced my stock allocation by 10% (from 70% to 60%) in February for valuation reasons, per my IPS.

Orthodox Bogleheads will call it market timing (it is, at a soft level), but I view it as an assessment of probabilities of future stock returns at current prices.
lol, that’s the textbook definition of market timing
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Re: Talk me out of changing AA to 50% stocks

Post by lostdog »

AerialWombat wrote: Tue Mar 23, 2021 12:45 pm
retiredjg wrote: Tue Mar 23, 2021 10:58 am I won't try to talk you out of it as it seems that your willingness to take risk has changed. And last March is recent enough to remember if it bothered you.

That said, I think moving from 30% to 50% is a big jump. But the other argument is that the 50% would still only be 33% of your wealth...so maybe it's ok. :happy
That's why I would do it with new money from the business sale. And no, last March didn't bother me at all. "Meh, whatever" was my reaction, which shocked me.
If that was your reaction then go for it. Short term volatility is more of a behavioral challenge for most.

Congrats on the business sale.
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Re: Talk me out of changing AA to 50% stocks

Post by watchnerd »

gips wrote: Wed Mar 24, 2021 7:53 am
watchnerd wrote: Wed Mar 24, 2021 7:36 am Ditto.

I actually reduced my stock allocation by 10% (from 70% to 60%) in February for valuation reasons, per my IPS.

Orthodox Bogleheads will call it market timing (it is, at a soft level), but I view it as an assessment of probabilities of future stock returns at current prices.
lol, that’s the textbook definition of market timing
Well, I didn't get out of the market completely.

But, sure, it's a form of market timing.

Slap me and call me a sinner.

We've met our number and we don't need to take that much risk any more, and at current valuations, the upside for playing the game looks less appealing.
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Re: Talk me out of changing AA to 50% stocks

Post by dratkinson »

AerialWombat wrote: Tue Mar 23, 2021 12:46 pm
random_walker_77 wrote: Tue Mar 23, 2021 10:44 am While increasing your stock asset allocation when the market is near a peak is usually the wrong time to do it, one could argue that you're just shifting some funds from a highly concentrated equity position in a single business to the overall stock market. Asset allocation should be considered over your entire holdings and not just a subset. So you're not really increasing your exposure to equities and are instead substantially increasing your diversification.

Though you didn't phrase it this way, it sounds like you want to go to 33% stocks, 33% bonds, and 33% real estate?
You're spot on, all the way around. I'm replacing private equity in a tech startup with an index fund.

I chose the 50/50 AA, because I don't know which will do better going forward... stocks or bonds.


REITs are tax-inefficient, so should be in a tax-advantaged account.


In taxable, it's okay to use TSM and muni bond fund. I'm assuming you're not in a low income tax bracket so can use munis.

An intermediate-term national muni fund is generally recommended as IT is reported to be on the sweet spot of the risk/return yield curve.

Since you've decided to take on a little more risk, compute the muni's TEY (taxable-equivalent yield) to ensure it out-performs TBM's SEC yield.
National muni fund TEY = muni SEC yield / (1-your fed tax bracket).

Depending upon your residence state, you might prefer the triple tax benefits (fed+state+city) of a single-state muni fund.
Single-state muni fund TEY = muni SEC yield / (1 -your fed tax bracket -your state tax bracket -your city tax bracket).

Since muni tax-exempt dividends don't add to AGI, they will also benefit the ~90% QDI dividends paid by TSM. The TEY calculation misses this benefit, but it should be seen in a sample tax return as lower tax owed.

If you go the single-state muni route, it's recommended to mix 50/50 national/single-state, to reduce single-state risk.



Disclosure. I bought my first muni fund while in the 15% fed tax bracket. At the time, an IT national muni fund (VWITX) sometimes produced more after-tax income than TBM. But a LT national muni fund (VWLTX) always did. (An IT muni does produce more after-tax income than local CDs, so I use it as an easier-to-manage tax-exempt CD substitute.)

Why did I use munis in a low tax bracket?
--Because I needed bonds. The bonds needed to be in taxable, because I was "shooting for the moon" by using 100% equities in my small Roth.
--Because my pension + frugal lifestyle meant I should not be forced to sell munis.
--Because muni dividends didn't add to my AGI, kept me longer in the 15% tax bracket, so I longer benefit from 0% taxation of TSM/TISM's QDI/LTCGs.
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Re: Talk me out of changing AA to 50% stocks

Post by Wiggums »

It sounds like you found the right AA for you. Having confidence in your funds and allocation is extremely important.

There’s really no need to change.

Congratulations.
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Re: Talk me out of changing AA to 50% stocks

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Re: Talk me out of changing AA to 50% stocks

Post by DSBH »

FIRE 4 years ago, thinking that we would keep our historical 60/40 AA and 5% re-balancing approach forever. 2020 did turn out well after-the-fact.

Towards the end of 2020, thinking that as retirees if we were to run into another "2020 or worse" in the future we would be more comfortable with a 50/50. As such if the market drops by 30%, we'll rebalance our way down (and then hopefully up) and our portfolio loss "should" not be more than 15% (our pain point !), so we switched to 50/50 AA.
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Re: Talk me out of changing AA to 50% stocks

Post by bltn »

David Jay wrote: Tue Mar 23, 2021 12:49 pm Your long retirement horizon also favors a higher stock allocation.
AerialWombat

I also think that 50 year retirement would be better served by the 33 1/3 stock allocation. Especially with your edit in the op suggesting you re still earn enough income working part time to cover your expenditures. As long as you have enough fixed income to cover rental property contingencies and several years of expenditures.
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Re: Talk me out of changing AA to 50% stocks

Post by Eagle33 »

AerialWombat wrote: Tue Mar 23, 2021 12:47 pm
David Jay wrote: Tue Mar 23, 2021 10:38 am I am not going to try to talk you out of it. If you did not suffer emotional distress in March of 2020, that is a good indication that you can move your AA a bit higher. AA between 75/25 and 25/75 is primarily a behavioral question.
Correct, no panic in March 2020. Thanks!
Not a good test case because that was the shortest bear market in history, Very easy to think you have greater risk tolerance than you actually have. A better evaluation of your risk tolerance would be if we are still in that bear market today and your current portfolio balance is exactly the same as it was 1 year ago. Would you feel the same about increasing your equity side of AA?
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Re: Talk me out of changing AA to 50% stocks

Post by AerialWombat »

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Re: Talk me out of changing AA to 50% stocks

Post by qwertyjazz »

AerialWombat wrote: Wed Mar 24, 2021 10:24 am
qwertyjazz wrote: Wed Mar 24, 2021 7:44 am It matters how you handle the 1/3 not index fund not bond portion and the relative amounts compared to your spending level.
How likely are you to find a risky concentrated investment that you will want to take more risk in?
How many years of living expenses does your current fixed income represent and proposed fixed income?

You should consider your investments in total and not just bonds and index funds to consider how to balance them.
I will end up with 1/3 in cash and bond indices, 1/3 in stock indices, and 1/3 in rental equity. That’s way more diversified than I am now, with so much private equity in one company (that I started).

Cash and fixed income will represent about a decade of living expenses. Right now it’s only five years.
I would probably make the change. You have mostly won the game and having 10 years in safe funds let’s you play more with the rest. I would probably not increase the fixed income part even if everything else increases - don’t rebalance into it in the near future.
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Re: Talk me out of changing AA to 50% stocks

Post by danbdzs »

Yours is an interesting case of how risk aversion seems to be a non-constant variable across time. Specially with the different circumstances you find your self now vs '09

I think there is a general consensus in that the change in allocation is a good idea for your long term results.

I'm with some posters that a 50/50 seems conservative given your age and situation but as long as you are aware of it I think it's a good idea.

Cheers,
Dan
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