Psychology of Asset Allocations - Seeking feedback

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Robin1234
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Psychology of Asset Allocations - Seeking feedback

Post by Robin1234 »

I am trying to figure out what asset allocation to settle down with. It seems one must evaluate long term growth with lower risk versus getting bigger returns at a price of bigger risk. So it is about how much risk (drawdown) can one tolerate.

In more practical terms one can get more modest growth but be able to sleep well, or one can strive for greater growth, put pay with sleepless nights & arguments with spouse, or in the worst case giving up pre-maturely. So far my reading of risk is - that it is how much volatility and maximum draw down one will face.

Firstly I am wondering is the above how most folks think about asset allocation or am I missing some important practical aspects.

Secondly in light of above, I am playing around with the Portfolio Visualizer and thinking of Paul's 4 fund vs. two other possibilities. I will look at some more asset allocations. But in this comparison - I am tempted to go down the path of my second option 80% QQQ & 20% TQQQ.

What are the cons to this asset allocation vs. Paul's 4 fund allocation that I may be failing to consider? I am seeking feedback so I can continue analyzing further, and figure out an asset allocation that will work for me. Something that is maximally aggressive, but where I won't give up when the hardest points are staring at me.

This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it. So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing. Thanks,

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10/26/21 Thanks for all the viewpoints. I truly appreciate it. Adding more to the conversation:

1. What she notices for the last 10 years I have gotten about 9% with my choices. Now that does not seem to compare too favorably to even the s&p500. Even s&p500 in last 10 years got 15%. So she is upset for me not being able to grow our investments. And compared to big Tech it is worse. We live in SV continually bumping in to peers in FB, GOOG, AMZN etc. This is partly the reason I think of QQQ. If I am not working for big tech, let big tech work for me.

2. She has a hard time getting interested in Equities & I am not too hot with RE. So we have ended up - me managing Equities & she managing RE.

3. Additional facts below, to seek out thoughts and points of views.



What are your ages?
56 & 49

About how long until expected retirement?
Currently I am aiming for 70. She quit 10-15 years ago for kids & family.

Will you be eligible for both a substantial pension and Social Security benefits?
No pension. My FRA benefit at 67 is $3300. Non-working spouse social security benefit would be $1650.

Do you have an emergency fund, if so how large is it?
$80K in my ESPP brokerage account. Primarily relying on HELOC for emergency funds.

About how much do you currently have in retirement investing accounts?
$1.8M (approx.)

What is your tax bracket, both federal and state? What is your tax filing status?
Married filed jointly. Federal 22%. State 7.5%.

About how much do you currently contribute annually to retirement accounts? Do you make maximum annual employee contributions to a plan at work like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or individual (solo 401k)?
Yes I maximize my 401K to about $22K approx. My 401K has provision for Designated Roth & After tax contributions too that I am not using yet. I am unclear what to do here.
Rest 403B...above I will need to read up. I am not well informed about them. My understanding is I hit limits because of maximizing my work 401k contributions, so I can not use any of them.

Do you make maximum annual contributions to an IRA? Does your wife contribute to an IRA as well, if so how much?
Both I ($6K approx.) and my wife ($6K approx.) put max allowable for Roth IRA.

Our home was completely paid off until about 2 years ago. It is worth $1.8M, but then we decided it was not a good investment.
So we took out $400K from it to buy multiple rental properties. All properties break even. Rent is equal to mortgage & property taxes.

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10/26/21 Current asset allocation

30% Large cap stocks
25% cash & bonds
25% Bitcoin & Gold ETF
10% TRP 2030
10% International Stock ETF
10% Small cap ETF

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01/16/2022 Still working on my asset allocation. Read the recommended books, read the responses. Now sharing some AA options I am seriously thinking about since my 10/26 update:

Stock/Bond 60/40 10% QQQE, 50% VTX, 40% BND

Stock/Bond 60/40 60%VTX, 40% BND

Stock/Bond 60/40 60% (Equally distribute money in 20 Blue chip stocks e.g. top 20 from NASDAQ or S&P500. Replace a stock if it drops out of the index, or if individual stock has draw down reaching 60%), 40% BND

In all cases re-balance annually or semi-annually, so I am less likely affected by market swings.

Looking to hear thoughts, suggestions & pointers.
Last edited by Robin1234 on Sun Jan 16, 2022 4:11 am, edited 4 times in total.
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AnnetteLouisan
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Re: Psychology of Asset Allocations - Seeking feedback

Post by AnnetteLouisan »

Never invest money that you can’t afford to lose, was the old saying, and there is truth to it. When I considered my equity allocation I always said to myself, how would I feel if it dropped 50 percent? For me that has meant keeping equities below 30 percent. YMMV.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by qwertyjazz »

‘ This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it. So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing’

This is what you are missing

You have the correct tittle in ‘Psychology’ but the wrong analysis. The most important thing in asset allocation is that you can stay with it for the long run. There will be periods of loses. How will your spouse react? Will you sell at the wrong time etc?
You should start more with historical education. Get your spouse on board with whatever AA you pick (secret - it matters far less than the psychology). You then need to write down your long term plan which you both agree to. Do not rush it - if you feel that you are behind and take risk you cannot emotionally handle, you will much much further behind over the next few decades as the stock market goes up and down.
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steve r
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Re: Psychology of Asset Allocations - Seeking feedback

Post by steve r »

I think psychology of asset allocation is huge.

It ultimately led me to a single fund solution with Schwab (index target date fund). It is slightly less international equities than Vanguard or Fidelity, no international bonds and an expense ratio of 0.08.

How did I get here. I tried a lot of things like you are describing. When it underperformed, staying the course became difficult. Read the threads on small cap value or international stock holdings. These have underperformed for a long time, and chunk them out separately meant staring at an underperforming asset again and again -- and rebalancing into it -- only to see it underperform again. And for your outperforming asset -- well I would be tempted for more not less. And I would always wonder if there was a better plan. I can assure you there is a better plan, I just have no idea what it is.

Will some outperform me? Sure. But probably not many "performance chasers" will do so.

The best thing for me was to have my target date fund outperform what I was doing ...

As for the OP, you have several different plans you are considering. One of them will outperform. Will it be the one you pick? No way of knowing. What if its not, will you be tempted to change the plan you picked. I do not know you, but I can say safely that I would -- absolutely Thus my belief on the psychology of investing.

See my signature.
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burritoLover
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Re: Psychology of Asset Allocations - Seeking feedback

Post by burritoLover »

Picking a concentrated portfolio based on what has done uncharacteristically well the last 10 years is a sure way to future crappy returns.
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steve r
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Re: Psychology of Asset Allocations - Seeking feedback

Post by steve r »

burritoLover wrote: Sat Oct 23, 2021 5:38 pm Picking a concentrated portfolio based on what has done uncharacteristically well the last 10 years is a sure way to future crappy returns.
+1 (a more to the point version of what I believe)
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
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Beensabu
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Beensabu »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm I am tempted to go down the path of my second option 80% QQQ & 20% TQQQ.
Oh good. We've gone from thinking of basic asset allocation as stocks:bonds to stocks:3x levered stocks. Cool.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Marseille07 »

This seems like a relationship issue in disguise. Something is wrong when your spouse is pounding you for "fallen behind my peers."

You need to get them to stop doing that immediately. It's insulting, unsupportive, and ridiculous.
Last edited by Marseille07 on Sat Oct 23, 2021 6:18 pm, edited 1 time in total.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by jebmke »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it.
An asset allocation will not fix this.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by KlangFool »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm
But in this comparison - I am tempted to go down the path of my second option 80% QQQ & 20% TQQQ.
mahtoji,

It is very simple.

It does not work. You cannot solve a saving rate problem with an aggressive portfolio.

It is a very simple calculation.

A) Your annual expense

B) Your annual saving and investment

C) Your current portfolio size

D) Your targeted number. Let's assume that it is 25 X (A).

E) Start a spreadsheet and put in annual return rate of 5% to 10%

F) See how many years before you reach your number.

If you are fallen behind, save more money and cut your expenses. Nothing else will help you.

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Re: Psychology of Asset Allocations - Seeking feedback

Post by sailaway »

Have you fallen behind your peers due to a failure to save, a failure to invest, or a failed investment? Or something else entirely?
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Re: Psychology of Asset Allocations - Seeking feedback

Post by tashnewbie »

An AA isn’t going to fix the issue of your wife “pounding” you for falling “behind” your peers.

You and your wife need to be on the same page with your investing plan.

You also need to stop comparing yourself to others. Compare yourself to yourself. Make goals and measure your progress to achieving them. Run your own race.
BogleFan510
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Re: Psychology of Asset Allocations - Seeking feedback

Post by BogleFan510 »

I would not overly rely on backtesting past performance data to make your decisions. The future is unknown and while useful, the future is not the past.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Charon »

Investing incredibly aggressively (more aggressively than 100% stocks, due to the leverage) because you feel behind is probably a recipe for disaster. In a market decline, you'll be losing money far faster than everyone around you, and I'm guessing your spouse will not be very supportive of that. As a result, I suspect you'll be likely to sell low, and lock in losses, thus underperforming the funds you were in long term.

So if you're going to judge based on backtesting, you'll also need to backtest over bad market periods, not just good ones. Being very aggressive gives big increases when the market's going up - and kills you when it's going down. Don't skip the latter side of things. (Going to be hard for TQQQ, which very coincidentally started March 2010... but you can test another leveraged stock fund for 2007-2009.)

There are some tools out there to help you think through this. If you're a Vanguard client, for example, there's https://investor.vanguard.com/calculato ... tionnaire/ .

But first you need to have a conversation with your spouse about your savings goals, for which asset allocation is not the most important piece. Your savings rate and your expenses are more important.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by fposte »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm
This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it. So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing.
When I look at your Bogleheads posts, two themes emerge. You're interested in aggressive growth, and you're very nervous about risk, to the point that you pulled a chunk out of the market in 2019 when the market was doing well. That doesn't seem like a good recipe for a shift to a riskier portfolio; when you talk about fighting your way back, it doesn't seem like you're thinking about how often you have to get knocked down and how possible it is that you'll lose. Imagine your portfolio being worth 75%, 50% of what it is now. How do you feel about that? Could you leave it alone if that happened?
Lionel Hutz
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Lionel Hutz »

fposte wrote: Sat Oct 23, 2021 7:16 pm
mahtoji wrote: Sat Oct 23, 2021 5:16 pm
This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it. So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing.
When I look at your Bogleheads posts, two themes emerge. You're interested in aggressive growth, and you're very nervous about risk, to the point that you pulled a chunk out of the market in 2019 when the market was doing well. That doesn't seem like a good recipe for a shift to a riskier portfolio; when you talk about fighting your way back, it doesn't seem like you're thinking about how often you have to get knocked down and how possible it is that you'll lose. Imagine your portfolio being worth 75%, 50% of what it is now. How do you feel about that? Could you leave it alone if that happened?
+1!

OP, if you are in stuck in traffic and switch lanes and get caught further behind, you aren’t going to “catch up” even if you get moving again.

I also caution against trying to overcompensate with an even more aggressive portfolio than suits you. You’re more likely to crash than to catch up. Just keep the car moving.

Know thyself. Set a risk tolerance that *you can stomach.

And if you think hiring an advisor or robo service will help and stop you from panic selling, then that’s money well spent. Do your research, find the version best for you (human or robo), don’t pay excessive fees (+0.5% is too much).
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Re: Psychology of Asset Allocations - Seeking feedback

Post by palaheel »

steve r wrote: Sat Oct 23, 2021 5:40 pm
burritoLover wrote: Sat Oct 23, 2021 5:38 pm Picking a concentrated portfolio based on what has done uncharacteristically well the last 10 years is a sure way to future crappy returns.
+1 (a more to the point version of what I believe)
+1

Also, just because you need a good return doesn't mean that the market will give it to you.
Nothing to say, really.
000
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Re: Psychology of Asset Allocations - Seeking feedback

Post by 000 »

I would just forget about anything with QQQ in the ticker.

Maybe there's a reason they chose the letter 'Q'. :twisted:
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Re: Psychology of Asset Allocations - Seeking feedback

Post by arcticpineapplecorp. »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm I am trying to figure out what asset allocation to settle down with. It seems one must evaluate long term growth with lower risk versus getting bigger returns at a price of bigger risk. So it is about how much risk (drawdown) can one tolerate.

In more practical terms one can get more modest growth but be able to sleep well, or one can strive for greater growth, put pay with sleepless nights & arguments with spouse, or in the worst case giving up pre-maturely. So far my reading of risk is - that it is how much volatility and maximum draw down one will face.

This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it.
1. how do you know you've fallen behind your peers? Do you and the guys, er, umm, compare portfolio size?

Also, so what if their gains are greater than yours? What if they bought Tesla or Bitcoin or some other speculative venture that happened to pay off due to luck, not skill? You weren't going to do that anyway, so why compare apples to oranges?

2. regarding your spouse you will have to find a way to compromise. That's usually what happens in marriage anyway, right? So a compromise is when two people both sacrifice something to get something they each want. Your wife wants greater growth and you want smaller drawdowns. You have to find a way to meet in the middle otherwise one of you will always be giving in and the other will always be getting what they want.

3. does your wife really understand the tradeoff for those higher returns she seeks? I mean really understand what losses can look (and feel) like? I think people go for growth and then panic when losses come. Seen it a million times here on bogleheads. In bull markets, people often think they can tolerate more risk than they discover they can in bear markets.

So if your wife wants the greater growth ask her what she's willing to lose and show her what various allocations have lost when markets have fallen by 50% and ask her what she'd do when these losses occur:

Image

4. if she's ok with the losses and would truly stay the course, she has a higher risk tolerance than you.

But make sure she understands the losses in dollars not just percentages. Paul Merriman talked about helping a prospect determine his risk tolerance. After the prospect settled on the sleep well at night point being a loss of 20% of his portfolio, Paul said "So you want me to manage $1 million. So you're ok losing $200K?" The prospect said "God No! I can't lose that much" and quickly realized he could only withstand a max loss of $100k. Well that changed the design of the portfolio from 50/50 to just 30/70, or from moderate/balanced to conservative with just one additional question/refocus from percentage to dollars. You've got to be honest with yourself. Your wife has to do likewise.

5. As long as you two can meet your goals with the allocation that gets you there you don't have to take any additional risk to achieve your goals. In other words, if you can meet your goals with a 5% CAGR why take the risk to earn 8% CAGR? You should only take an amount of risk you have the need to take. And ability. And Willingness. It's all right here:

https://www.cbsnews.com/news/asset-allo ... -you-take/

https://www.cbsnews.com/news/asset-allo ... tolerance/

https://www.cbsnews.com/news/asset-allo ... -you-need/

https://www.cbsnews.com/news/asset-allo ... ing-goals/

6. The returns are likely generated by your asset allocation rather than your selection of fund choices. Research shows returns aren't defined by stock selection nearly as much as it is by allocation differences. So stick to total market index funds. The difference in risk/return comes down largely to your asset allocation anyway. Don't get fancy with fund choices.

7. Finally, as for arguments with your spouse, as long as you have a spare couch you should be good.
Last edited by arcticpineapplecorp. on Mon Dec 06, 2021 6:55 pm, edited 1 time in total.
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luckyducky99
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Re: Psychology of Asset Allocations - Seeking feedback

Post by luckyducky99 »

The cruel irony of the AA question is that the people who can afford to take the most risk, and reap the biggest reward, are the ones that don't care or worry about money for whatever reason.

If your main concern is that your spouse is "pounding" you about this kind of thing, then you need to sit down with them and go over the possibilities, good and bad, of difference AAs and figure out what works for both of you in terms of risk profile. Unfortunately, if you think you've fallen behind, it's not really possible to play "catch up" in this game. It's not like you can "work harder" at investing and make more money with less risk, you just have to take what the market offers.

IMO, going all in on QQQ to the tune of over 100% is not a good plan for any risk profile. The risk is way too concentrated.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by 000 »

If one is going to reach for returns trying to play catchup IMHO it would make more sense to:
(1) buy a diversified portfolio of more volatile assets
(2) tilt towards something other than what has done most well recently

For example, smaller emerging markets, deep SCV, gold miners, or junk bonds make more sense as risky 'catchup' plays than QQQ to me.
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arcticpineapplecorp.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by arcticpineapplecorp. »

luckyducky99 wrote: Sat Oct 23, 2021 10:13 pm The cruel irony of the AA question is that the people who can afford to take the most risk, and reap the biggest reward, are the ones that don't care or worry about money for whatever reason.

If your main concern is that your spouse is "pounding" you about this kind of thing, then you need to sit down with them and go over the possibilities, good and bad, of difference AAs and figure out what works for both of you in terms of risk profile. Unfortunately, if you think you've fallen behind, it's not really possible to play "catch up" in this game. It's not like you can "work harder" at investing and make more money with less risk, you just have to take what the market offers.

IMO, going all in on QQQ to the tune of over 100% is not a good plan for any risk profile. The risk is way too concentrated.
agreed. good points.

and to show the OP here's the difference in performance between the total US stock market and the QQQs during the dot com bubble burst:

Image

source: https://www.portfoliovisualizer.com/bac ... ion2_2=100

the total market fell 38% between 2000-2002 but the QQQs lost 74% over the same time period (did twice as bad).

undiversified portfolios like QQQs may magnify gains, but don't ever forget they magnify losses too. That's what concentration does:
“...concentrating your portfolio in a few stocks maximizes your chances of getting rich. Unfortunately, it also maximizes your chance of becoming poor. Owning the whole market—indexing—minimizes your chances of both outcomes by guaranteeing you the market return.” (The Four Pillars of Investing by William Bernstein, pg. 102).
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Re: Psychology of Asset Allocations - Seeking feedback

Post by pkcrafter »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm I am trying to figure out what asset allocation to settle down with. It seems one must evaluate long term growth with lower risk versus getting bigger returns at a price of bigger risk. So it is about how much risk (drawdown) can one tolerate.

You have received some very good replies, so I just want to focus on a few critical fundamentals.

In more practical terms one can get more modest growth but be able to sleep well, or one can strive for greater growth, put pay with sleepless nights & arguments with spouse, or in the worst case giving up pre-maturely. So far my reading of risk is - that it is how much volatility and maximum draw down one will face.

Well, your view is fundamentally correct, but your strategy is fundamentally off. Sleepless nights and a concerned spouse are not an option. I can see why spouse is concerned--your ideas are pretty radical.


Firstly I am wondering is the above how most folks think about asset allocation or am I missing some important practical aspects.

Secondly in light of above, I am playing around with the Portfolio Visualizer and thinking of Paul's 4 fund vs. two other possibilities. I will look at some more asset allocations. But in this comparison - I am tempted to go down the path of my second option 80% QQQ & 20% TQQQ.

OH Noooooo. That is a pretty non-diversified portfolio with leverage. A more reasonable portfolio would be anchored with total stock market. Then you might add some QQQ. Poster Nisiprius has demonstrated several times that leverage doesn't compensate for the risk taken.

What are the cons to this asset allocation vs. Paul's 4 fund allocation that I may be failing to consider?

High risk without full compensation for the risk taken. I can't recommend Merriman's 4 fund either because it has 50% in small caps. This will give you high tracking error and extended periods of poor performance. Wife won't be happy with it.

Maybe something like:

total stock market
total international (15-30%)
QQQ
Bonds


I am seeking feedback so I can continue analyzing further, and figure out an asset allocation that will work for me. Something that is maximally aggressive, but where I won't give up when the hardest points are staring at me.

Asset allocation is always a compromise. A couple of questions are: what % of your total income is going into investments? What is total of retirement portfolio?

This need to be aggressive is because I feel I have fallen behind my peers.

NOT a good reason at all. This should have no bearing on your personal situation. Are you sure your peers are giving you accurate information? Do they even know what they are doing? At any rate, whatever they say or claim regarding returns should be dismissed and should never have any bearing on your allocations or strategy.


, and I am getting pounded by my spouse on account of it.

Are you saying spouse is complaining because your returns are lower than friends, or are you saying spouse is complaining because you are trying to compete with friends by increasing risk?

So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing. Thanks,

What you are missing is focusing on your own personal situation. These is no free lunch. You seem to have lost focus by telling spouse that friends returns are bigger than yours. No, your head ain't on straight.

Risk Tolerance

https://www.bogleheads.org/wiki/Risk_tolerance

This one is out of date, but there is still some good info on allocation and risk,

https://investingroadmap.wordpress.com/2011/02/25/205/


Paul

When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Activesloth »

Your age is an important factor in your asset allocation. I don’t see it. I’m 64, and I’m an aggressive investor. I’m not a fan of bonds, especially now that they have a negative return. Since March 2000, I’ve allocated 100% in stocks. Most will think that’s too risky but I have other income sources. I try to diversify between large and small cap domestic stocks. I won’t need to draw any money for 8 years, maybe 11 years if the RMD age is raised to 75. I’m not suggesting you go 100% stocks, unless of course your in your 20s or 30s.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Fallible »

mahtoji wrote: Sat Oct 23, 2021 5:16 pm I am trying to figure out what asset allocation to settle down with. It seems one must evaluate long term growth with lower risk versus getting bigger returns at a price of bigger risk. So it is about how much risk (drawdown) can one tolerate. ...
It won't be easy, but try to see the forest for the trees you're caught up in: stop with the "catching up," step back and look at the bigger picture, not just aggressive allocations to make up for lost time, but at how you and your wife together view not just investing, but money in your lives. It's not just about your risk tolerance, but about hers and how much you can tolerate as a team.

To start, try Morgan Housel's recent book The Psychology of Money and/or Jonathan Clements's How to Think About Money.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Beensabu »

OP - What is your current asset allocation? The one that you're thinking about changing in order to "catch up to peers"?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
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ruralavalon
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Re: Psychology of Asset Allocations - Seeking feedback

Post by ruralavalon »

Some additional information would be useful in answering your questions. See my questions below.

Please simply add this to your original post using the edit button (the pencil icon near the upper right corner of your post), it helps a lot if all of your information is in one place.


mahtoji wrote: Sat Oct 23, 2021 5:16 pm I am trying to figure out what asset allocation to settle down with. It seems one must evaluate long term growth with lower risk versus getting bigger returns at a price of bigger risk. So it is about how much risk (drawdown) can one tolerate.

In more practical terms one can get more modest growth but be able to sleep well, or one can strive for greater growth, put pay with sleepless nights & arguments with spouse, or in the worst case giving up pre-maturely. So far my reading of risk is - that it is how much volatility and maximum draw down one will face.

Firstly I am wondering is the above how most folks think about asset allocation or am I missing some important practical aspects.
What are your ages? About how long until expected retirement? Will you be eligible for both a substantial pension and Social Security benefits? Do you have an emergency fund, if so how large is it?

Those are all major factors in deciding on a desired asset allocation.

Here are some resources helpful in picking a fixed income allocation (fixed income can include bonds, bond funds, I-bonds, CDs, savings accounts, a Stable Value Fund or a Guaranteed Income Fund, money market funds). A fixed income allocation can substantially reduce portfolio volatility (risk). Graph, "An Efficient Frontier: the power of diversification". Please see:
1) Wiki article Bogleheads® investment philosophy, part 3 "Never bear too much or too little risk";
2) Wiki article, "Asset allocation";
3) Morningstar (8/20/2019), "The Best Diversifiers for Your Equity Portfolio", link;
4) Morningstar (4/8/2020), "What's the Best Diversifier for Stocks?", link;
5) White Coat Investor (9/23/2016), "In Defense of Bonds", link;
6) Ben Carlson (8/2/2020), "Why Would Anyone Own Bonds Right Now?", link;
7) Morningstar (4/13/2021), "Which Bonds Provide the Biggest Diversification Benefits?", link; and
8) Age versus stocks, graph. Boglehead's stock allocations, bar graph and table.

Asset allocation is a very personal decision. You as a couple must decide on an allocation that is comfortable for you based on your own ability, willingness and need to take risk.


mahtoji wrote: Sat Oct 23, 2021 5:16 pmSecondly in light of above, I am playing around with the Portfolio Visualizer and thinking of Paul's 4 fund vs. two other possibilities. I will look at some more asset allocations. But in this comparison - I am tempted to go down the path of my second option 80% QQQ & 20% TQQQ.

What are the cons to this asset allocation vs. Paul's 4 fund allocation that I may be failing to consider? I am seeking feedback so I can continue analyzing further, and figure out an asset allocation that will work for me. Something that is maximally aggressive, but where I won't give up when the hardest points are staring at me.
Decide on your desired asset allocation before considering which funds or exchange traded funds (ETFs) to use.

I see no reason to use that combination of Invesco QQQ Trust (QQQ) and ProShares UltraPro QQQ (TQQQ).

My suggestion is to keep it simple using very broadly diversified index funds (to decrease your risk) with low expense ratios (to increase your net returns).


mahtoji wrote: Sat Oct 23, 2021 5:16 pmThis need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it. So I am attempting to fight my way back, while keeping my head straight. I want to hear some opinions that help uncover blind spots, or offer opportunities to consider that I may be missing. Thanks,

[Images not helpful]
About how much do you currently have in retirement investing accounts?

You may not be far behind your peers, as you and your wife fear.

Financial Samurai (8/4/2021), link.

If far behind then the better catch up strategy is a high rate of contributions, rather than taking high risk.

What is your tax bracket, both federal and state? What is your tax filing status?

About how much do you currently contribute annually to retirement accounts? Do you make maximum annual employee contributions to a plan at work like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or individual (solo 401k)? Do you make maximum annual contributions to an IRA? Does your wife contribute to an IRA as well, if so how much?

Establishing a high rate of contributions is the most important investing decision you can make, forum discussion.
Last edited by ruralavalon on Mon Oct 25, 2021 12:33 pm, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Nowizard
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Nowizard »

Other than those who for whatever reasons have huge asset totals combined with psychological sets consistent with less spending that assets support, you are in good company. As others have said, a huge key is allocation you can sustain. Tortoise and hare analogy appropriate, perhaps. Ultimately, from a psychological perspective it seems that one approach is to focus on defining the best overall process you can, using sites like this along with other relevant information sources and accepting that process, not outcome, is all you can control. You may, for example, have an excellent process that either provides higher or lower returns based on factors that are not solely related to asset allocation; things like unexpected vocational changes, illness, unexpected inheritance or other windfall, etc.

Tim
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Re: Psychology of Asset Allocations - Seeking feedback

Post by ruralavalon »

Robin1234 wrote: Sat Oct 23, 2021 5:16 pmWhat are your ages?
56 & 49

About how long until expected retirement?
Currently I am aiming for 70. She quit 10-15 years ago for kids & family.

Will you be eligible for both a substantial pension and Social Security benefits?
No pension. My FRA benefit at 67 is $3300. Non-working spouse social security benefit would be $1650.

Do you have an emergency fund, if so how large is it?
$80K in my ESPP brokerage account. Primarily relying on HELOC for emergency funds.

. . . . .
10/26/21 Current asset allocation

30% Large cap stocks
25% cash & bonds
25% Bitcoin & Gold ETF
10% TRP 2030
10% International Stock ETF
10% Small cap ETF
In my opinion your current asset allocation (75% stocks/25% fixed income) is more aggressive than usual for your situation (ages 56 and 49 with no pension). In my opinion that is risky. At age 53ish around 60% stocks/40% fixed income might be more usual.


Robin1234 wrote: Sat Oct 23, 2021 5:16 pmAbout how much do you currently have in retirement investing accounts?
$1.8M (approx.)

What is your tax bracket, both federal and state? What is your tax filing status?
Married filed jointly. Federal 22%. State 7.5%.

About how much do you currently contribute annually to retirement accounts? Do you make maximum annual employee contributions to a plan at work like a 401k, 403b, 457b, SEP IRA, SIMPLE IRA, or individual (solo 401k)?
Yes I maximize my 401K to about $22K approx. My 401K has provision for Designated Roth & After tax contributions too that I am not using yet. I am unclear what to do here.
Rest 403B...above I will need to read up. I am not well informed about them. My understanding is I hit limits because of maximizing my work 401k contributions, so I can not use any of them.

Do you make maximum annual contributions to an IRA? Does your wife contribute to an IRA as well, if so how much?
Both I ($6K approx.) and my wife ($6K approx.) put max allowable for Roth IRA.
It is good to see you making maximum annual employee contributions to your 401k, and maximum annual contributions to two Roth IRAs.

"My 401K has provision for Designated Roth & After tax contributions too that I am not using yet. I am unclear what to do here."

Is sounds like your employer's 401k plan might permit a Mega Backdoor Roth (MBR). If so that is a wonderful opportunity to increase your use of tax-advantaged investing. If the other necessary features are present, then take advantage of the MBR.

Does your employer's 401k plan also permit EITHER in-plan Roth conversions of the non-Roth after-tax contributions, OR in-service distribution of the non-Roth after-tax contributions to an IRA, OR both?

TFB blog post, "The Elusive Mega Backdoor Roth".

White Coat Investor, "The Mega Backdoor Roth IRA"
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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Beensabu
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Beensabu »

Robin1234 wrote: Sat Oct 23, 2021 5:16 pm This need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it.

...

1. What she notices for the last 10 years I have gotten about 9% with my choices. Now that does not seem to compare too favorably to even the s&p500. Even s&p500 in last 10 years got 15%. So she is upset for me not being able to grow our investments.
That's not terrible at all, considering your current asset allocation.
30% Large cap stocks
25% cash & bonds
25% Bitcoin & Gold ETF
10% TRP 2030
10% International Stock ETF
10% Small cap ETF
You can't compare a 75/25 stock/bond portfolio to a 100 stock portfolio. Or rather, a 50/25/25 stock/gold/bond to a 100 stock portfolio.
2. She has a hard time getting interested in Equities & I am not too hot with RE. So we have ended up - me managing Equities & she managing RE.
Sounds like both of you know what you're managing. If you trust her to know what she's doing (it's not like you're giving her a hard time about being cash neutral on the rental properties), then she needs to trust you to know what you're doing.

The asset allocation you have isn't one you just pick at random. You decided to do that for a reason (or for several reasons).

The super aggressive tech concentration plus leveraged tech concentration you initially indicated was under contemplation is a complete turnaround from a portfolio that keeps 25% in gold. I sincerely doubt you actually believe in that aggressive of an approach, just based on your current allocations, which show a diversified portfolio that's obviously geared towards reducing volatility.

I don't understand the 10% in TRP 2030 when you could you just break the bits of that out and lower fees, but whatever. You probably have a reason.

Everything else you've said in your edit shows that you're in a really good situation. You don't need to take the kind of risk you're thinking of taking. You just don't need to. It's a perception vs. reality thing. You (or your wife) may think you've fallen behind, but you're actually doing great. And if you take more risk when you don't need to in order to "catch up" then you may end up in a place where you're not doing great anymore. So, is that worth it? Is the possibility of "doing better" worth the risk of ending up in a worse position than you are currently in?
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Re: Psychology of Asset Allocations - Seeking feedback

Post by 000 »

I think I am much more bullish on your current asset allocation than QQQ.

Curious, how much do you have in bitcoin?
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Re: Psychology of Asset Allocations - Seeking feedback

Post by ruralavalon »

Robin1234 wrote: Sat Oct 23, 2021 5:16 pmThis need to be aggressive is because I feel I have fallen behind my peers, and I am getting pounded by my spouse on account of it.

. . . . .

About how much do you currently have in retirement investing accounts?
$1.8M (approx.)

. . . . .

Our home was completely paid off until about 2 years ago. It is worth $1.8M, but then we decided it was not a good investment.
So we took out $400K from it to buy multiple rental properties. All properties break even. Rent is equal to mortgage & property taxes.
You have about $2,200k in investments.

Get over the idea that you are behind your peers. You are far ahead of your peers.

You have to need to be aggressive in your asset allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
Nowizard
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Nowizard »

Your original post indicates a concern about drawdown. There are the usual studies quoted that suggest no more than 4% during those years, often with suggestions that a smaller percentage be considered. One, recent comment that I had not seen before makes sense to me and removes one fault of withdrawing set percentages, that being the approach does not reflect the market, only a choice not dependent on it but focusing on an amount need for expenses. Obtaining an annual withdrawal amount that is sustainable is desirable since it results in increasing or decreasing amounts withdrawn based on current, market performance. Use of the RMD table which is based on life expectancy does that. Those who are not yet in RMD stages can get an estimate based on current asset totals using the initial divisor. Adding all assets and applying the divisor for the first RMD year will provide an estimate of safe, current withdrawal that is more accurate than a percentage total.

Tim
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Nate7out »

You mention falling behind your peers - but you are in 22% Fed Tax bracket (so am I) - the techies making $300k+ and getting tons of equity from their company are not really your peers, though they may live in your area.

It seems inappropriate for your spouse to pound you about this issue, unless you have significantly deviated from the investment approach you previously agreed on. I did notice in a past post that you got out of the market in 2019. Your spouse could legitimately complain about that if you did it unilaterally.

You could just as easily complain to your spouse about rental properties that don't cashflow - you will be paying maintenance/repairs, vacancy, CapEx out of pocket. If these are in the same area as your residence; this does not change the nature of your RE exposure very much. You took money out of your residence for these investments, but are still relying solely on price appreciation in that area.

More appropriately, you should agree with your spouse on an investment approach for both your investment portfolio and real estate and stick with it.

You are looking at a few radically different asset allocations that don't show a good understanding of risk. You should probably just be in target date funds. If your wife really wants more wealth she should probably go back to work so you can save/invest more.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by aristotelian »

OP,
Sounds like you are investing out of emotion, in this case shame brought on by negativity from your spouse as well as jealousy of peers and Fear of Missing Out. Number one rule of investing is to have a rational approach and stick to it. With $2M and 9% return you have absolutely nothing to be ashamed of and you are already taking plenty of risk.

IMO the approach your spouse is recommending is fundamentally irrational because it has higher risk without higher expected return. Sure QQQ and FANG stocks have done well in the past, but moving forward we have no idea whether they will continue to go up or become a Dot Com 2.0 bubble. Their expected return is not fundamentally different than stocks as a whole, but they are a whole lot riskier.

Sorry she is giving you a hard time when in fact she is the one who is in the wrong. Just to make peace you might set aside an account with funds you are willing to risk and let her invest her money however she wants.
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Re: Psychology of Asset Allocations - Seeking feedback

Post by WoodSpinner »

Nowizard wrote: Thu Oct 28, 2021 9:02 am Your original post indicates a concern about drawdown. There are the usual studies quoted that suggest no more than 4% during those years, often with suggestions that a smaller percentage be considered. One, recent comment that I had not seen before makes sense to me and removes one fault of withdrawing set percentages, that being the approach does not reflect the market, only a choice not dependent on it but focusing on an amount need for expenses. Obtaining an annual withdrawal amount that is sustainable is desirable since it results in increasing or decreasing amounts withdrawn based on current, market performance. Use of the RMD table which is based on life expectancy does that. Those who are not yet in RMD stages can get an estimate based on current asset totals using the initial divisor. Adding all assets and applying the divisor for the first RMD year will provide an estimate of safe, current withdrawal that is more accurate than a percentage total.

Tim
Interesting, I have heard of this approach but have many questions ….

How long have you been using this approach?
Do you feel that the this approach provides the income stream profile you need at different stages of Retirement?
Do you make any adjustments for goals that include: Charitable Giving? Long Term Care? Inheritance?

WoodSpinner
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Nowizard »

I have only heard of this recently but back-tested and found that it holds water. As for what the proceeds are spent on, that would depend on results for that year. For some, when market was up, more charitable giving would be possible, for others less. As for projections into the future, the RMD chart goes to age 96, I believe. Based on our assets, expenditures and retirement income (SS and a small pension), our issue has been that RMD's provide more than needed when combined with income. This results in donations, gifts to family or reinvestment of excess in taxable accounts. Retirement occurred 15-years ago, and back testing indicates this approach would have been successful and more concrete than withdrawing an amount based on a Monte Carlo projection. It also has the advantage of being an annual event where figures are already available for other purposes such as the IRS requirements and of being based on current assets as they exist at a specific time.

Tim
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Re: Psychology of Asset Allocations - Seeking feedback

Post by Mullins »

Recognizing the nature of equities, I've learned to change my thinking as the means to change my emotions for the most part, as feelings do follow thoughts, rather than compromise potential long term gains.
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