Progressively Increase Stock Allocation

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invest2bfree
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Progressively Increase Stock Allocation

Post by invest2bfree »

If you are in the accumulation phase and and are 10+ years from retirement.

Assume you have $1,000,000

with a 70/30 allocation.

Stocks have a 5% correction, instead of re balancing you go 75/25.
Another 5% correction you go 80/20.

Progressively go until you hit 100% in stocks.

Now you wait until you get back to $1,000,000 with 100% in stocks.

Then you do the reverse with every 5% up move you move 5% into bonds until you get 70/30.

How does this strategy workout?

What are the pitfalls.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
Marseille07
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Re: Progressively Increase Stock Allocation

Post by Marseille07 »

The pitfall is that it might lag going 100/0 today and staying there because you might stay at 70/30 for a long time before raising the glidepath.
jebmke
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Re: Progressively Increase Stock Allocation

Post by jebmke »

"Balanced" allocations are, in a large part, designed to help one avoid psychological pitfalls like panic selling, not re-balancing etc. One of the pitfalls of hypothetical scenarios like yours is that they casually assume those psychological pitfalls aren't there. That is a fundamentally flawed way to think about the entire problem. They are real, and loom large for many people.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
000
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Re: Progressively Increase Stock Allocation

Post by 000 »

Come on, 5% dips are nothing.

Go big or go home.
jebmke
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Re: Progressively Increase Stock Allocation

Post by jebmke »

000 wrote: Wed Oct 27, 2021 5:31 pm Come on, 5% dips are nothing.

Go big or go home.
I'm old enough to remember a 22% down day. My wife was in the business (buy side). We avoided the sidewalks in the financial district to make sure we didn't get hit by falling portfolio managers.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
jarjarM
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Re: Progressively Increase Stock Allocation

Post by jarjarM »

000 wrote: Wed Oct 27, 2021 5:31 pm Come on, 5% dips are nothing.

Go big or go home.
:thumbsup No point making AA adjustment based on mere 5% drop if at all.
000
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Re: Progressively Increase Stock Allocation

Post by 000 »

jebmke wrote: Wed Oct 27, 2021 5:33 pm
000 wrote: Wed Oct 27, 2021 5:31 pm Come on, 5% dips are nothing.

Go big or go home.
I'm old enough to remember a 22% down day. My wife was in the business (buy side). We avoided the sidewalks in the financial district to make sure we didn't get hit by falling portfolio managers.
Brutal :shock:
luckyducky99
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Re: Progressively Increase Stock Allocation

Post by luckyducky99 »

What you're suggesting is a complicated way of hiding some flaws either in your logic or in your plan. I don't know what your internal thinking is, but here's my take on the two most likely issues.

(1) It implies that you have the risk tolerance to be 100% equities, because you're basically saying "I'm willing to be 100% equities after a large downturn." Now cross out the "after a large downturn" part because that shouldn't affect your risk tolerance. So if that's your true risk tolerance, and you're accumulating and you're 10+ years from retirement, why are you 70/30 in the first place? You should be 100% equities from the start.

And practically speaking, most people do not get an appetite for taking on even more risk after a large crash, most people get scared and run the other direction. But if that's not the case, again, you should just be all equities to start with.

(2) If your response to the critique in (1) is, "No, something something dry powder something ... something wait til the crash to buy in" then what you're describing is a market timing strategy. These generally don't work, because stocks spend more time going up than down, and holding equities through the ups and downs does better on average than missing the ups while waiting for the downs.
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invest2bfree
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Re: Progressively Increase Stock Allocation

Post by invest2bfree »

luckyducky99 wrote: Wed Oct 27, 2021 5:50 pm What you're suggesting is a complicated way of hiding some flaws either in your logic or in your plan. I don't know what your internal thinking is, but here's my take on the two most likely issues.

(1) It implies that you have the risk tolerance to be 100% equities, because you're basically saying "I'm willing to be 100% equities after a large downturn." Now cross out the "after a large downturn" part because that shouldn't affect your risk tolerance. So if that's your true risk tolerance, and you're accumulating and you're 10+ years from retirement, why are you 70/30 in the first place? You should be 100% equities from the start.

And practically speaking, most people do not get an appetite for taking on even more risk after a large crash, most people get scared and run the other direction. But if that's not the case, again, you should just be all equities to start with.

(2) If your response to the critique in (1) is, "No, something something dry powder something ... something wait til the crash to buy in" then what you're describing is a market timing strategy. These generally don't work, because stocks spend more time going up than down, and holding equities through the ups and downs does better on average than missing the ups while waiting for the downs.
Very nicely put.

I hate the sense of helplessness when the stock market is down and I don’t have dry powder.

So I try to time the market when I feel there is a sell off I sell out and buy it back later. Problem with that is that we get lots of false positives so I miss out.

But Iam trying to be a Bogle head and want to be in the market all the time. So trying to figure out such kind of rules work.

If we run into a Japan like scenario or 1929 then I definitely run out of luck.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
Robin1234
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Re: Progressively Increase Stock Allocation

Post by Robin1234 »

What if you left your AA at 75/25 until there truly is once in a lifetime like correction e.g. 2000, 2009. I suspect in such situations the correction is fairly well announced and understood, thanks to all the discussions and analysis. Now usually it takes considerable time before recovery begins taking shape. At this point may be you can take your time, and then consider going in with your 100/0 strategy. Rather than continually doing it. Just a thought. I am no expert, in fact - far from it.
carminered2019
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Re: Progressively Increase Stock Allocation

Post by carminered2019 »

I am retired and flexible with my AA so last March to May I went from 60/40 to 95/5.
Last edited by carminered2019 on Thu Oct 28, 2021 12:18 am, edited 1 time in total.
Northern Flicker
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Re: Progressively Increase Stock Allocation

Post by Northern Flicker »

As long as one's stock allocation is at least 25% or some undetermined but similar number, the percentage of stock is a measure of risk. Increasing the percentage, increases risk.
Jaymover
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Re: Progressively Increase Stock Allocation

Post by Jaymover »

invest2bfree wrote: Wed Oct 27, 2021 5:20 pm If you are in the accumulation phase and and are 10+ years from retirement.

Assume you have $1,000,000

with a 70/30 allocation.

Stocks have a 5% correction, instead of re balancing you go 75/25.
Another 5% correction you go 80/20.

Progressively go until you hit 100% in stocks.

Now you wait until you get back to $1,000,000 with 100% in stocks.

Then you do the reverse with every 5% up move you move 5% into bonds until you get 70/30.

How does this strategy workout?

What are the pitfalls.
Hey one formula I have been using is as follows:

AA into bonds =(current portfolio value/target portfolio value )* retirement allocation in bonds

eg

current portfolio value = 1 million
target portfolio value = 2 million (amount is actual future dollars, not pv)
retirement allocation in bonds = 40 percent
Therefore current asset allocation = 80/20

If there is a bear market then your AA will gently increase. If there is a bull market then you will back off on the risk as you approach your target.
Jaymover
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Re: Progressively Increase Stock Allocation

Post by Jaymover »

Jaymover wrote: Thu Oct 28, 2021 12:09 am
invest2bfree wrote: Wed Oct 27, 2021 5:20 pm If you are in the accumulation phase and and are 10+ years from retirement.

Assume you have $1,000,000

with a 70/30 allocation.

Stocks have a 5% correction, instead of re balancing you go 75/25.
Another 5% correction you go 80/20.

Progressively go until you hit 100% in stocks.

Now you wait until you get back to $1,000,000 with 100% in stocks.

Then you do the reverse with every 5% up move you move 5% into bonds until you get 70/30.

How does this strategy workout?

What are the pitfalls.
Hey one formula I have been using is as follows:

AA into bonds =(current portfolio value/target portfolio value )* retirement allocation in bonds

eg

current portfolio value = 1 million
target portfolio value = 2 million (amount is actual future dollars, not pv)
retirement allocation in bonds = 40 percent
Therefore current asset allocation = 80/20

If there is a bear market then your AA will gently increase. If there is a bull market then you will back off on the risk as you approach your target.

Topic Author
invest2bfree
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Re: Progressively Increase Stock Allocation

Post by invest2bfree »

Northern Flicker wrote: Wed Oct 27, 2021 10:34 pm As long as one's stock allocation is at least 25% or some undetermined but similar number, the percentage of stock is a measure of risk. Increasing the percentage, increases risk.
Yes but stocks at p/e=10 are way less risky than stocks at p/e=25.

Also use this strategy on VT only, so be as much diversified as possible.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
Topic Author
invest2bfree
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Re: Progressively Increase Stock Allocation

Post by invest2bfree »

000 wrote: Wed Oct 27, 2021 5:31 pm Come on, 5% dips are nothing.

Go big or go home.
Yes but 70 to 65 is a 9% correction.

You progressively load up next down from 75 to 70 another 9% correction.
36% (IRA) - Individual LT Corporate Bonds , 33%(taxable) - schy, 33%(taxable) - SCHD Dividend Growth
UpperNwGuy
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Re: Progressively Increase Stock Allocation

Post by UpperNwGuy »

invest2bfree wrote: Wed Oct 27, 2021 5:20 pm If you are in the accumulation phase and and are 10+ years from retirement.

Assume you have $1,000,000

with a 70/30 allocation.

Stocks have a 5% correction, instead of re balancing you go 75/25.
Another 5% correction you go 80/20.

Progressively go until you hit 100% in stocks.

Now you wait until you get back to $1,000,000 with 100% in stocks.

Then you do the reverse with every 5% up move you move 5% into bonds until you get 70/30.

How does this strategy workout?

What are the pitfalls.
What would be the purpose of such a strategy, and could that purpose be achieved by other, more conventional, means?
secondopinion
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Re: Progressively Increase Stock Allocation

Post by secondopinion »

luckyducky99 wrote: Wed Oct 27, 2021 5:50 pm What you're suggesting is a complicated way of hiding some flaws either in your logic or in your plan. I don't know what your internal thinking is, but here's my take on the two most likely issues.

(1) It implies that you have the risk tolerance to be 100% equities, because you're basically saying "I'm willing to be 100% equities after a large downturn." Now cross out the "after a large downturn" part because that shouldn't affect your risk tolerance. So if that's your true risk tolerance, and you're accumulating and you're 10+ years from retirement, why are you 70/30 in the first place? You should be 100% equities from the start.

And practically speaking, most people do not get an appetite for taking on even more risk after a large crash, most people get scared and run the other direction. But if that's not the case, again, you should just be all equities to start with.

(2) If your response to the critique in (1) is, "No, something something dry powder something ... something wait til the crash to buy in" then what you're describing is a market timing strategy. These generally don't work, because stocks spend more time going up than down, and holding equities through the ups and downs does better on average than missing the ups while waiting for the downs.
If 70/30 is the least one would accept and 100/0 is the most one will accept, then the average allocation is 85/15. Easiest compromise.

Concavity is the last reason to engage in not doing 100%. Since not everyone believes in writing put options, in theory one can replicate put writing by holding a certain amount of stocks and bonds and adjusting them frequently. Written put options attempt to profit on a positive direction and overestimated volatility; whereas, the synthesis of adjusting the stocks and bonds in quicker intervals results in profits according to the realized volatility and the direction. I am not saying to make the entire portfolio this way (or one needs to do it outside of a tax-advantaged account), but 30% of the portfolio dedicated to such a method could be a systematic way to aggressively insert/remove a lot of "dry powder" without requiring emotion or timing. How one implements this is left for the reader; there are many ways how this could get implemented and all of them have their advantages and disadvantages.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
000
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Re: Progressively Increase Stock Allocation

Post by 000 »

invest2bfree wrote: Thu Oct 28, 2021 8:07 am
000 wrote: Wed Oct 27, 2021 5:31 pm Come on, 5% dips are nothing.

Go big or go home.
Yes but 70 to 65 is a 9% correction.

You progressively load up next down from 75 to 70 another 9% correction.
The problem is 9% is not a big move and there still may be plenty of downside potential in the market. You might inch up to 100% and then face another 50% drop with no more dry powder.

Two consecutive 9% drops on VTI would take us back to a price level that was available just 7 months ago.
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markjk
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Re: Progressively Increase Stock Allocation

Post by markjk »

I think the pitfall here is it's just another form of market timing which has been proven to fail in most situations (historically speaking).
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invest2bfree
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Re: Progressively Increase Stock Allocation

Post by invest2bfree »

markjk wrote: Thu Oct 28, 2021 7:24 pm I think the pitfall here is it's just another form of market timing which has been proven to fail in most situations (historically speaking).
What if this becomes part of your IPS?
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Joey Jo Jo Jr
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Re: Progressively Increase Stock Allocation

Post by Joey Jo Jo Jr »

carminered2019 wrote: Wed Oct 27, 2021 10:25 pm I am retired and flexible with my AA so last March to May I went from 60/40 to 95/5.
Nice! Intuitively things like this and the OP’s idea make a lot of sense to me. The counter argument seems to be that you’d be better off if you just went 95% in perpetuity. However, my counter to that would be that I can’t really stomach a 33% downturn, but my odds of good returns are obviously much better after such an event. In other words, it’s not necessarily a strategy to beat the market, but to better optimize returns within the limits of your own risk tolerance.
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markjk
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Re: Progressively Increase Stock Allocation

Post by markjk »

invest2bfree wrote: Thu Oct 28, 2021 10:35 pm
markjk wrote: Thu Oct 28, 2021 7:24 pm I think the pitfall here is it's just another form of market timing which has been proven to fail in most situations (historically speaking).
What if this becomes part of your IPS?
Sure, that's fair. To be clear, I don't think this is necessarily a bad thing to do. I was just pointing out that it seems like market timing. What if your thresholds aren't ever met? What if your thresholds are overrun in a single bad (or good day)? It also seems like some work to manage. Is all of that better than just setting an AA and rolling with it? I suspect it's not in most situations. Good discussion though.
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