Sleeping well with 50% S&P 500 and 50% Target Index

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orsocorso
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Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

Hello Friends,

For the last several years I have been been trying to sleep well at night.
I have been 100% s&p 500 more or less, while trying on different asset allocations in the interim.
Even though I have a conviction about the S&P, I can't help but feel overexposed to one asset class and one country. I also feel that the S&P 500 may be becoming a meme or bubble, as it were. So even though I sleep pretty well, there is still the nagging doubt about the future and the present. On top of that I don't really like bonds and I don't see them as much more than ballast (which at present is even dubious because in some instances they return less than inflation!). Since I'm young and yields are suspect, I am inclined to find them mostly disagreeble at this time. Contradictorily, I feel a bit naked with 0% bonds. I am comfortable with the idea of owning up to 40% bonds from age 65 and onward. But I am having some indecision about anything else. I don't like being indecisive and I value simplicity and prudence.

So I have tried various asset allocations in my Roth and HSA, ultimately going back to 100% S&P 500 for the last few years:

-I could not sleep well with 3 fund portfolio (because I simply have trouble with perfectionism and exact percentages; indecisiveness, doubt).
-I couln't sleep with 100% target date (Too many bonds with time, too much international); but I love the idea of the target date!
-I couldn't sleep with any combination of total world (makes me uncomfortable), though I appreciate the majesty of this fund's existence!
-I couldn't sleep With a 2 fund portfolio of Short Term Bond Index and S&P 500, nor with total bond index
-I couln't sleep well with ETFs
-I couldn't sleep well with slice and dice -- one night was all it took!

Theoretically, I can handle the S&P and enough cash to sleep at night -- but intuitively, I don't believe this is a wise move for myself. It feels . . . irresponsible.

So, my next experiment is 50% S&P 500 and 50% Target Index. If I can sleep well for the next few months, this may be my compromise with myself.
This will keep my international exposure in the right range of not too high and not too low. And my bond exposure will eventually fit my comfort level when I am older. I will have diversification, but not too much of it. I will rebalance to a 50/50 allocation once yearly on my birthday and I think I can live with this. In my 401(k), which is 100% S&P 500, I do not have a target date option. So for now I believe I will do my age in Wellesley. I think it will improve my sleep.

I trust the S&P 500, I just don't trust it entirely. I trust target index funds, but I don't trust them entirely.

Together, perhaps they will balance one another out.

Please share your thoughts or experiences if you have done anything similar.
Last edited by orsocorso on Sat Dec 04, 2021 9:24 am, edited 1 time in total.
dukeblue219
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by dukeblue219 »

If you can sleep at night when the stock market is falling 2 or 3 percent in the daytime then it's good enough for me.
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

dukeblue219 wrote: Sat Dec 04, 2021 9:22 am If you can sleep at night when the stock market is falling 2 or 3 percent in the daytime then it's good enough for me.

I like that thought -- that there's a measurable parameter to gauge tolerance. And I don't have a problem with that so far. When I see a daily drop, I get excited to buy more. But if I saw a decade of drops as such, I think I'd feel uncomfortable.
dukeblue219
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by dukeblue219 »

orsocorso wrote: Sat Dec 04, 2021 9:36 am
dukeblue219 wrote: Sat Dec 04, 2021 9:22 am If you can sleep at night when the stock market is falling 2 or 3 percent in the daytime then it's good enough for me.

I like that thought -- that there's a measurable parameter to gauge tolerance. And I don't have a problem with that so far. When I see a daily drop, I get excited to buy more. But if I saw a decade of drops as such, I think I'd feel uncomfortable.
And for what it's worth, nobody sleeps well at night when something like March 2020 happens anyway. That's why I mentioned the 2 to 3% bad days that get all the attention. Even if you're 100% bonds when the stock market drops 11%, those kind of days happen when it seems like the whole system is about to come crashing down around us. Not much you can do about that except drink a glass of wine and watch a good movie.
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vanbogle59
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by vanbogle59 »

orsocorso wrote: Sat Dec 04, 2021 9:36 am
dukeblue219 wrote: Sat Dec 04, 2021 9:22 am If you can sleep at night when the stock market is falling 2 or 3 percent in the daytime then it's good enough for me.

I like that thought -- that there's a measurable parameter to gauge tolerance. And I don't have a problem with that so far. When I see a daily drop, I get excited to buy more. But if I saw a decade of drops as such, I think I'd feel uncomfortable.
Well, if there is a measurable parameter, it sure isn't 2-3%.
You need an AA that can handle MUCH bigger drops. 20% or more is very common. 50% is typical recommended stress test. (Some recommend even higher.)

If a 4% drop in the S&P keeps you up at night you are seriously over allocated to equities.

If you were around for the 2008 panic, ponder how you behaved then.
If not, read up on it and try to imagine going through it. Could you sleep?
dukeblue219
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by dukeblue219 »

vanbogle59 wrote: Sat Dec 04, 2021 9:54 am Well, if there is a measurable parameter, it sure isn't 2-3%.
You need an AA that can handle MUCH bigger drops. 20% or more is very common. 50% is typical recommended stress test. (Some recommend even higher.)
To be clear I said 2 or 3% in a day. I find it's the really bad days that get people panicking over their AA and making rash decisions. The historically bad days are scary no matter your allocation.

Whether your withdrawal rate can tolerate a 50% fall in equities is a somewhat different question
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JoMoney
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by JoMoney »

Likely a matter of mincing words/personal definitions, but the idea of "trusting the S&P 500" rubs me the wrong way.
Don't get me wrong, the bulk of my investments are in S&P 500 stocks, but in my mind it's just the good-enough way to settle into stock investing, and stock investing in general is the investment I feel compelled to do if I save and hope for a retirement. In my opinion, It's the best of bad options to grow wealth for most people. It's the word "trust" that in my mind that feels too strong to use in this situation... but maybe that's just me. :?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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vanbogle59
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by vanbogle59 »

dukeblue219 wrote: Sat Dec 04, 2021 9:58 am
vanbogle59 wrote: Sat Dec 04, 2021 9:54 am Well, if there is a measurable parameter, it sure isn't 2-3%.
You need an AA that can handle MUCH bigger drops. 20% or more is very common. 50% is typical recommended stress test. (Some recommend even higher.)
To be clear I said 2 or 3% in a day. I find it's the really bad days that get people panicking over their AA and making rash decisions. The historically bad days are scary no matter your allocation.

Whether your withdrawal rate can tolerate a 50% fall in equities is a somewhat different question
I think we agree.
I just fear OP is looking for confirmation that he can handle this risk profile. My guess is that's very wishful thinking.
IDK. Personal investing is personal!
:beer
Wannaretireearly
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by Wannaretireearly »

Maybe try a new mattress
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Candor
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by Candor »

That's a lot of tinkering and poor sleep. You can analyze your portfolio to death in the search for a perfect mix but sometimes you just have find one that is good enough. I hope you have found it.
The fool, with all his other faults, has this also - he is always getting ready to live. - Seneca Epistles < c. 65AD
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arcticpineapplecorp.
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by arcticpineapplecorp. »

orsocorso wrote: Sat Dec 04, 2021 9:19 am Please share your thoughts or experiences if you have done anything similar.
the amount of risk to take is based on your need, ability and willingness.

you're focusing on the willingness part, which is fine, but don't forget the need and ability part either. You might not "need" to swing for fences, so why take more risk than you need to. So on. Read more 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/

finally, the sleep well at night factor is based on tolerating certain worst case scenarios. while the stock market dropped more than 50% before (80% in the Great Depression) since then, it's fallen around 50%, so look at your worst case scenarios based on that and design the portfolio (asset allocation) to the point at which you'll lose the maximum you can tolerate:

Image

convert the percentage loss into dollar losses and be honest with yourself. Paul Merriman told a story of a prospect who initially admitted he could sleep well at night if he lost 20% but no more. Merriman looked at the asset size which was $1 million and asked the prospect if he was ok with losing $200k. The prospect was aghast. Merriman asked him how much in dollars he was willing to lose and the prospect said $100k. You can see from the numbers above if Merriman hadn't asked those clarifying questions he would have designed a balanced portfolio (40/60) for the prospect, rather than the more conservative portfolio (25/75) based on the prospect's "actual" risk tolerance.

which allocation will work for you?
Last edited by arcticpineapplecorp. on Mon Dec 06, 2021 6:55 pm, edited 1 time in total.
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Topic Author
orsocorso
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Joined: Mon Jun 10, 2019 11:17 am

Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

I just fear OP is looking for confirmation that he can handle this risk profile. My guess is that's very wishful thinking.
IDK. Personal investing is personal!
:beer
[/quote]

Why would I be looking for confirmation that I can handle 100% S&P 500 if my question is about how to get away from that in a way that I am comfortable with?
Topic Author
orsocorso
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Joined: Mon Jun 10, 2019 11:17 am

Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

Wannaretireearly wrote: Sat Dec 04, 2021 10:02 am Maybe try a new mattress
Helpful —
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

arcticpineapplecorp. wrote: Sat Dec 04, 2021 10:10 am
orsocorso wrote: Sat Dec 04, 2021 9:19 am Please share your thoughts or experiences if you have done anything similar.
the amount of risk to take is based on your need, ability and willingness.

you're focusing on the willingness part, which is fine, but don't forget the need and ability part either. You might not "need" to swing for fences, so why take more risk than you need to. So on. Read more 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/

finally, the sleep well at night factor is based on tolerating certain worst case scenarios. while the stock market dropped more than 50% before (80% in the Great Depression) since then, it's fallen around 50%, so look at your worst case scenarios based on that and design the portfolio (asset allocation) to the point at which you'll lose the maximum you can tolerate:

Image

convert the percentage loss into dollar losses and be honest with yourself. Paul Merriman told a story of a prospect who initially admitted he could sleep well at night if he lost 20% but no more. Merriman looked at the asset size which was $1 million and asked the prospect if he was ok with losing $200k. The prospect was aghast. Merriman asked him how much in dollars he was willing to lose and the prospect said $100k. You can see from the numbers above if Merriman hadn't asked those clarifying questions he would have designed a balanced portfolio (40/60) for the prospect, rather than the more conservative portfolio (25/75) based on the prospect's "actual" risk tolerance.

which allocation will work for you?
Thank your for helping me look at this more clearly and for providing helpful examples of how to be more honest and realistic. I appreciate your time and knowledge. I’ll check these links out carefully. You’re right about swinging for the fences — I never thought about it like that.
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

JoMoney wrote: Sat Dec 04, 2021 10:00 am Likely a matter of mincing words/personal definitions, but the idea of "trusting the S&P 500" rubs me the wrong way.
Don't get me wrong, the bulk of my investments are in S&P 500 stocks, but in my mind it's just the good-enough way to settle into stock investing, and stock investing in general is the investment I feel compelled to do if I save and hope for a retirement. In my opinion, It's the best of bad options to grow wealth for most people. It's the word "trust" that in my mind that feels too strong to use in this situation... but maybe that's just me. :?
As you said — semantics. Trust is an honest word.
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

Candor wrote: Sat Dec 04, 2021 10:07 am That's a lot of tinkering and poor sleep. You can analyze your portfolio to death in the search for a perfect mix but sometimes you just have find one that is good enough. I hope you have found it.

Thank you.
Freefun
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by Freefun »

I've relied on various asset allocation / worst case scenarios to determine my comfort level.For example this commonly known VG diagram helps me:

https://investor.vanguard.com/investing ... allocation

I don't know why it would be more complicated than that.
Remember when you wanted what you currently have?
randomguy
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by randomguy »

orsocorso wrote: Sat Dec 04, 2021 10:38 am I just fear OP is looking for confirmation that he can handle this risk profile. My guess is that's very wishful thinking.
IDK. Personal investing is personal!
:beer
Why would I be looking for confirmation that I can handle 100% S&P 500 if my question is about how to get away from that in a way that I am comfortable with?
[/quote]


Why doesn't your perfectionism keep you up with this scheme? Why will holding 51% S&P 500, 49% target not keep you up like it did with the 3 fund?

Seriously there isn't anything really wrong about what you are doing but you are adding a bunch of moving parts that just makes it harder to see what is going on. You have a target date fund which will periodically get more conservative. Age in Wellesley which will get more conservative but probably at a different rate.
If you want 50% S&P 500, 10% international, 40% bonds (for a made up level), why not just hold it rather than jump through all these hoops?
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

I only have Wellesley, S&P 500 and Short term bond available in my 401k

There aren’t any international funds, etc.


And my suspicion is that I will appreciate more diversification when I have more to lose since I don’t have very much now.
Wannaretireearly
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by Wannaretireearly »

orsocorso wrote: Sat Dec 04, 2021 10:39 am
Wannaretireearly wrote: Sat Dec 04, 2021 10:02 am Maybe try a new mattress
Helpful —
Sorry bud, I shouldn’t post before coffee.
The advice you’ll get here is golden re: diversification and AA.
I think settling on a good AA and ignoring ALL noise is critical.
If you really understand a few AA and diversification options, choose one and move forward. There is no perfect plan.

If you can’t take action, perhaps that’s an indication you need an advisor help from vanguard etc

I am heavily weighted on the international side. Perhaps just over 50%. Imo it’s a good time to pick up some vanguard intl funds as some diversification.
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

I think settling on a good AA and ignoring ALL noise is critical.
If you really understand a few AA and diversification options, choose one and move forward. There is no perfect plan.

If you can’t take action, perhaps that’s an indication you need an advisor help from vanguard etc

I am heavily weighted on the international side. Perhaps just over 50%. Imo it’s a good time to pick up some vanguard intl funds as some diversification.
[/quote]


I appreciate this response, especially the two points that (1) "there is no perfect plan" and (2) we should "ignore the noise".

I think that's the point for me -- I'm looking for the perfect plan because I'm scared of falling short. And I need to adjust me expectations to "good enough," based on the sound Boglehead principles which you alluded to. And that takes a willingness to just accept that there are things I just can't know and I have to choose something for the sake of sanity and survival. Accepting that there are things that no one can know will help to ignore the noise. It's like I can't choose between the courses of action suggested by Buffett, Bogle, Larimore, and Charles Ellis. It's maddening -- :greedy :oops:

Your response is very helpful. Thank you, again!
Topic Author
orsocorso
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Re: Sleeping well with 50% S&P 500 and 50% Target Index

Post by orsocorso »

orsocorso wrote: Sat Dec 04, 2021 2:19 pm I think settling on a good AA and ignoring ALL noise is critical.
If you really understand a few AA and diversification options, choose one and move forward. There is no perfect plan.

If you can’t take action, perhaps that’s an indication you need an advisor help from vanguard etc

I am heavily weighted on the international side. Perhaps just over 50%. Imo it’s a good time to pick up some vanguard intl funds as some diversification.

I appreciate this response, especially the two points that (1) "there is no perfect plan" and (2) we should "ignore the noise".

I think that's the point for me -- I'm looking for the perfect plan because I'm scared of falling short. And I need to adjust my expectations to "good enough," based on the sound Boglehead principles which you alluded to. And that takes a willingness to just accept that there are things I just can't know and I have to choose something for the sake of sanity and survival. Accepting that there are things that no one can know will help to ignore the noise. It's like I can't choose between the courses of action suggested by Buffett, Bogle, Larimore, and Charles Ellis. It's maddening -- :greedy :oops:

Your response is very helpful. Thank you, again!
[/quote]
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