Should I change Asset Allocation to a more conservative mix

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ram
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Should I change Asset Allocation to a more conservative mix

Post by ram »

http://blog.aarp.org/2015/03/09/six-les ... ll-market/
I was reading the article by Alan Roth posted by Taylor. This line made me pause to think. " Consider taking some risk off the table"

Over the last 6 years we have done well. A few years ago I had made a table of projected annual savings, projected returns and projected net worth. The savings have been higher than projected. (thanks to this forum) and returns have been higher. The net worth today is what I had projected for in mid 2017.

The projected plan was for 21% bonds and 79 % stocks for this calender year. (I am there today). Future projection was to increase bond component by 1% per year till 2020 and by 2% per year till 2025 such that it would be 65 stock/ 35 bond by 2025. Then review the situation and plan retirement date and then load up on more bonds to about 60/40 or 50/50 by retirement time.

Firecalc shows that we should be well set by at least 2 or 3 years before our initially projected retirement dates and maybe even earlier. When I played around with the investment options in firecalc the failure rates of 20% or more for our desired withdrawal amount for desired duration came up only if 70% or more was invested in treasury bonds. (no plans of doing that).

I did not panic in 2008 and actually increased my allocation to stocks modestly in 2008-2009 as they were on sale then.

I have been rewarded handsomely for aggressively investing in stocks for the last 6 years. Is it time to move to a table with lower stakes while I have won.

I am looking for general insights than actual numbers and experiences of people who have done this or not done this and in retrospect may have different thoughts about it.
Ram
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Re: Should I change Asset Allocation to a more conservative

Post by RadAudit »

ram wrote: Is it time to move to a table with lower stakes while I have won.
Well, since you are asking, the answer is probably yes.

Just before 2000, I projected that if things kept going the way they had been going - I'd have more than enough to retire early and take a really nice overseas trip. They didn't keep going like I had projected.

The portfolio dropped by more than 40% as I recall.

I retired in 2010. I haven't got overseas, yet. Maybe next year.
FI is the best revenge. LBYM. Invest the rest. Stay the course. Die anyway. - PS: The cavalry isn't coming, kids. You are on your own.
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asset_chaos
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Re: Should I change Asset Allocation to a more conservative

Post by asset_chaos »

If it were me, I wouldn't pay capital gains tax to be more conservative, but if I wanted to reduce risk faster, I would start redirecting stock dividends and all my fresh savings to bonds. If you're much closer to the retirement nest egg you think will do, perhaps also consider changing your 1% glide path to 2% (or some other number): continue to get gradually more conservative a little quicker. If have enough in tax-advantaged accounts, perhaps consider the 2% (or some other small number) change now and be done with getting on the new glide path this year. I'm a little leery of large, precipitous changes in allocation---especially if it generates taxes---but gradual ones because of changed circumstances seem fine. Also, I think that 2 or 3 years ahead of projection is probably well within the expected variability of such projections. It likely wouldn't take more than a perfectly normal 10% stock or bond market correction to move you 2 or 3 years behind projection.
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bluejello
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Re: Should I change Asset Allocation to a more conservative

Post by bluejello »

asset_chaos wrote:If it were me, I wouldn't pay capital gains tax to be more conservative, but if I wanted to reduce risk faster, I would start redirecting stock dividends and all my fresh savings to bonds.
+ 1
Bill M
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Re: Should I change Asset Allocation to a more conservative

Post by Bill M »

asset_chaos wrote:If it were me, I wouldn't pay capital gains tax to be more conservative, but if I wanted to reduce risk faster, I would start redirecting stock dividends and all my fresh savings to bonds.
+1
You didn't mention whether investments are in tax-deferred accounts. That would be another easy way to adjust asset allocation without incurring any capital gains.
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Bustoff
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Re: Should I change Asset Allocation to a more conservative

Post by Bustoff »

bluejello wrote:
asset_chaos wrote:If it were me, I wouldn't pay capital gains tax to be more conservative, but if I wanted to reduce risk faster, I would start redirecting stock dividends and all my fresh savings to bonds.
+ 1
In that article Roth also said: "Sticking to an asset allocation forced me to buy stock funds in 2009 and sell now."
leonard
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Re: Should I change Asset Allocation to a more conservative

Post by leonard »

ram wrote:http://blog.aarp.org/2015/03/09/six-les ... ll-market/
I was reading the article by Alan Roth posted by Taylor. This line made me pause to think. " Consider taking some risk off the table"

Over the last 6 years we have done well. A few years ago I had made a table of projected annual savings, projected returns and projected net worth. The savings have been higher than projected. (thanks to this forum) and returns have been higher. The net worth today is what I had projected for in mid 2017.

The projected plan was for 21% bonds and 79 % stocks for this calender year. (I am there today). Future projection was to increase bond component by 1% per year till 2020 and by 2% per year till 2025 such that it would be 65 stock/ 35 bond by 2025. Then review the situation and plan retirement date and then load up on more bonds to about 60/40 or 50/50 by retirement time.

Firecalc shows that we should be well set by at least 2 or 3 years before our initially projected retirement dates and maybe even earlier. When I played around with the investment options in firecalc the failure rates of 20% or more for our desired withdrawal amount for desired duration came up only if 70% or more was invested in treasury bonds. (no plans of doing that).

I did not panic in 2008 and actually increased my allocation to stocks modestly in 2008-2009 as they were on sale then.

I have been rewarded handsomely for aggressively investing in stocks for the last 6 years. Is it time to move to a table with lower stakes while I have won.

I am looking for general insights than actual numbers and experiences of people who have done this or not done this and in retrospect may have different thoughts about it.
"taking X of the table" is always code for market timing and it seems to be in this case.

So, you should analyze your situation and ask "what has changed" since you set up your target Asset Allocation. If something has changed for YOU - your need or desire or ability to take risk has changed - then consider changing.

If you are making the decision because of what the market is doing - then it's simply market timing. The average investor doesn't meet with a lot of success market timing.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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midareff
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Re: Should I change Asset Allocation to a more conservative

Post by midareff »

The last six years have been special. What happens in the future is unknown for stocks and bonds. If I was still in accumulation I'd be tempter to look for some high yielding 5 year CD's to buffer risk..
Twins Fan
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Re: Should I change Asset Allocation to a more conservative

Post by Twins Fan »

I agree that it sounds a lot like market timing. OP, you say yourself that you increased allocation to stocks in 2008-2009. If you changed to a more conservative set up now and the next six years don't go as well, would you change back to a more aggressive set up then?

Rebalancing alone should be taking the "winnings" and moving them over to the conservative side for you, and someday may move them back over to the aggressive side when that needs funding. Net worth is not a locked in number and we all know that. Sounds like you have a good plan and glide path in place. Stick to it! :happy
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Re: Should I change Asset Allocation to a more conservative

Post by Dandy »

If you can reduce risk by taking some "profits" off the table now, especially with little or no tax impact, I'd do it. You have a very aggressive portfolio and aim to reduce risk soon - why let the market reduce your equity assets. If you had a more modest allocation I would be less tempted.

I view a glide path plan as a pilot of a ship - you set a course and can and should make minor adjustments while keeping pretty close to your course. e.g. I have a plan to reduce equity allocation to 40% by age 70. In 2013 I let equity allocation rise to 45% and then took some profits. In 2014 I barely made any moves. I stand at about 42% now with 3 years to go. If the market plunges I may buy more equities if it soars I might sell - I am focused on the goal and time to reach that goal and allow myself leeway on how I get there. I haven't locked myself in to a 1% per year rule - just get there by age 70.
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Re: Should I change Asset Allocation to a more conservative

Post by basspond »

Ask yourself are you doing this to cash in on earnings or preservation? Cashing in to me means market timing, preservation changing your allocation. You have a plan, stick with it.
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Re: Should I change Asset Allocation to a more conservative

Post by Aptenodytes »

The OP's thought process doesn't smell like market timing to me. Ram is looking at spending needs, savings rates, and plausible returns between now and retirement. If one can meet needs with lower returns, then logically it makes sense to consider dialing down the risk. This kind of thought process is quite different than simply saying "many I have a bunch more money today."
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Leif
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Re: Should I change Asset Allocation to a more conservative

Post by Leif »

I've read Bill Bernstein has said as much.

I'm sticking will my AA, however, I've been rebalancing (sell equities) each year for the last couple of years, even though equities are within my rebalance band. Also, my 2%/year glide path has me selling equities.

I don't know the details of your situation or your need to take risk. However, your allocation seems high. If you think your asset allocation should depend on market valuation then you should write that into your investment plan and stick with that.
Last edited by Leif on Mon Mar 16, 2015 1:43 pm, edited 1 time in total.
Twins Fan
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Re: Should I change Asset Allocation to a more conservative

Post by Twins Fan »

I will agree that if preservation is the goal here, a new plan is made, and that plan is stuck to it does not seem like timing. But, if things don't go so well the next handful of years and the plan gets changes back the other way....

My thinking is the OP is talking couple or few years ahead of schedule here (for now). That could change back to being right on schedule fairly quickly. I don't see a need to change the plan at this point. Now, if they said the last six years were so great we have enough to retire now but want to continue working for another 10 years or so,.... sure they won the game so stop playing. Sounds like they may not even be at halftime though. :happy
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Re: Should I change Asset Allocation to a more conservative

Post by Dandy »

You can't be afraid of making relatively minor moves, on rare occasions, especially ones that result in less risk, as being a MARKET TIMER. Stay the course is a great guideline but shouldn't be thought of as a commandment. You are not a Market timing sinner if you make an occasional change. Lock step adherence to a plan made awhile ago often needs some adjusting.

Alan Roth is a pretty respected investment person, so is Rick Ferri (who after careful consideration is increasing his International exposure), so is Mr. Bogle who recently advocated supplementing Total Bond fund with some additional corporate bond exposure. Vanguard (much to some people's displeasure) has added international bonds to Target Date and Life Strategy funds. Many respected investment people advised adding some CDs vs all bonds.

So don't let the well meaning purists shame you into thinking every change is market timing. Frequent tinkering can be harmful to your portfolio and that is why staying the course as a general idea is sound.

The key is are you doing this out of rash fear or greed? Is it a modest change to your plan? Has it been awhile since you made these types of moves? Have you rushed into the move or given it careful consideration?
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Re: Should I change Asset Allocation to a more conservative

Post by lack_ey »

It doesn't help the OP to classify and debate whether or not a shift in allocation is market timing. In fact, people probably spend too much time thinking in these terms altogether. I like this short article from Mike Piper:
http://www.obliviousinvestor.com/moving ... ng-wisdom/

Anyway, just because the market is highly random and difficult to predict out in the future doesn't mean that the current value of one's holdings is an unknown too. As time goes on, the current value of your holdings changes. Just as an unexpected death, windfall, or other life event may significantly change the current state of your finances and warrant a shift in course to keep on track, so too may unexpected market movements.
ram wrote:I am looking for general insights than actual numbers and experiences of people who have done this or not done this and in retrospect may have different thoughts about it.
Unfortunately there seems to be some missing/wrong words or a botched edit here. I can't tell if this is supposed to be calling for general insights, experiences, or both.

Here are some things to reconsider (hopefully none of this is new, just maybe with a different spin or is worth considering) under the general insights category, if that is at all helpful.
  • It should be expected that investment performance will put you a few years ahead or behind schedule at any given point. That is the nature of the markets. Never anticipate getting the average or what is "supposed" to happen. It generally won't be that way.
  • The further away from retirement, the more meaningless this schedule is. A few years ahead doesn't really mean much of anything if the projection is out 20 years. It means a lot more if that is a change from 8 to 5 years.
  • The role of stocks in the long term (multiple decades) is for growth of capital at some rate that beats inflation. However, that's a description of a long-term tendency, one that might not even show up in your lifetime when you need it.
  • The actual primary effect of stocks, especially in the time scales that human beings can relate to, is to increase the uncertainty about the future value of the portfolio. With more stocks, you make both really great and really bad outcomes more likely. Switching to more bonds reduces the probabilities of the really bad outcomes and makes the future values more certain.
  • Beware of using historical data in Firecalc and other sources to project out to the future, especially if that data set focuses on a curious emerging market becoming the singular global superpower, a period of rapid population growth, and the emergence of women in the workforce, among other factors.
There are lots of stories of people regretting not dialing down the risk, but that is generally for those with less than a decade left to retirement, who don't have time to recoup losses. A sensible course of action here would strongly depend on goals, current portfolio size, and number of years to retirement, among other things.
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Re: Should I change Asset Allocation to a more conservative

Post by livesoft »

I would say yes, especially if you can do it without tax consequences in tax-advantaged accounts. Today would be a great day to start on this with the markets up about 1%.

I will predict that tomorrow will be a good day, too, but not as lively as today since many institutional buyers/sellers will slow down waiting for the outcome of the FOMC meeting.

A couple years ago I shifted from 62% equities to 58% equities. (31% US, 31% foreign to 29% US, 29% foreign). It seems like such a small change, but somehow it made a world of difference to me. My IPS allows me to bump up to 62% equities on certain days (you know what I call them). So I think if you tried going down from 79% to 75% equities, you might be surprised how you react to that.
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leonard
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Re: Should I change Asset Allocation to a more conservative

Post by leonard »

lack_ey wrote:It doesn't help the OP to classify and debate whether or not a shift in allocation is market timing. In fact, people probably spend too much time thinking in these terms altogether. I like this short article from Mike Piper:
http://www.obliviousinvestor.com/moving ... ng-wisdom/
Despite what Mike Piper says - the choice to change investments based on the market - market timing - usually doesn't work out well for investors. The motivation for changing AA matters.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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Re: Should I change Asset Allocation to a more conservative

Post by Fallible »

ram wrote:http://blog.aarp.org/2015/03/09/six-les ... ll-market/
I was reading the article by Alan Roth posted by Taylor. This line made me pause to think. " Consider taking some risk off the table" ...

I have been rewarded handsomely for aggressively investing in stocks for the last 6 years. Is it time to move to a table with lower stakes while I have won. ...
IMO, whether you've "won" or how much you've won in a six-year bull market is less important than how you will feel when the bull ends and your true tolerance for risk is revealed. Your concern about this after reading Allan's advice to consider lowering risk and avoid "pain" in a down market also may signal new and lower tolerance for risk. For that reason alone, lowering the stakes now would be a wise move.
"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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ram
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Re: Should I change Asset Allocation to a more conservative

Post by ram »

Thank you all for your insight.
For clarification more than 50% of the savings are in tax deferred acs and the changes in asset allocation if any will all be made within the tax deferred accounts.
It would be reasonable to say that there is no consensus among the intelligent crowd on this board and frankly that is not surprising. My asset allocation is aggressive but it likely due to something that I did not mention in the original post. My (our) earning span is lower than the average person because of long training for both of us before starting our first real jobs. We are therefore going to have few but well paid years on the job.
The ability to take risk is well preserved. (for the currently planned allocation). We both work in fields for which there is projected shortage for the next 10 years and our jobs are secure. The question was whether there is a need for it.
The fact that a couple of years ahead is well within the 95% confidence intervals of the mean is a good point that I will take away from this thread.
For now I have directed all new money to the bond allocation.(actually stable value fund) If markets continue to boom at some point I will accelerate my march towards bonds. I have always been somewhat more aggressive in my stock allocation than what is typically recommended on this board.
Also once I move towards a more bond heavy allocation there will be no turning back. If worse comes to worse I will work longer.
Again the path of 1 or 2% increase is not set in stone. A 2% variation from it may occur depending on market conditions. (Instead of 75/25 on a given year it might be 77/23) On a 'really really bad day' I might move 1% of my NW from bonds to stock (in tax deferred ac) but for now I am going to resist doing that if it is simply a "RBD" . Thanks again.
Ram
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Peter Foley
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Re: Should I change Asset Allocation to a more conservative

Post by Peter Foley »

Dandy wrote:
You can't be afraid of making relatively minor moves, on rare occasions, especially ones that result in less risk, as being a MARKET TIMER. Stay the course is a great guideline but shouldn't be thought of as a commandment. You are not a Market timing sinner if you make an occasional change. Lock step adherence to a plan made awhile ago often needs some adjusting.
This is fairly close to my philosophy as well. In the case of the OP, I understand him to be stating that because of market returns over the past years he is able to reach his goal with less risk. I would add that his need to take risk to reach his goal is less than it was. His retirement date is more than 10 years out, and he speaks of doing a subsequent review in 2025. I see no problem with resetting one's AA under these circumstances.
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ram
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Re: Should I change Asset Allocation to a more conservative

Post by ram »

asset_chaos wrote:If it were me, I wouldn't pay capital gains tax to be more conservative, but if I wanted to reduce risk faster, I would start redirecting stock dividends and all my fresh savings to bonds. If you're much closer to the retirement nest egg you think will do, perhaps also consider changing your 1% glide path to 2% (or some other number): continue to get gradually more conservative a little quicker. If have enough in tax-advantaged accounts, perhaps consider the 2% (or some other small number) change now and be done with getting on the new glide path this year. I'm a little leery of large, precipitous changes in allocation---especially if it generates taxes---but gradual ones because of changed circumstances seem fine. Also, I think that 2 or 3 years ahead of projection is probably well within the expected variability of such projections. It likely wouldn't take more than a perfectly normal 10% stock or bond market correction to move you 2 or 3 years behind projection.
So true. I am still on target but the 'ahead of target' scenario has faded.
Ram
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ram
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Re: Should I change Asset Allocation to a more conservative mix

Post by ram »

I reviewed this thread again today. As many pointed out in the replies markets can go down and they have.
In March 2015 after considering all opinions I had elected to "stay the course". In retrospect 'as of today' that was a bad decision. However it may still turn out to be a satisfactory decision by the time I (we) retire. My retirement is at least 10 yrs away and my wife will cut back / retire once we are sure that we have enough.
My willingness to take risk does not seem to have decreased. I was about 80/20 in March 2015 when I started the thread. Between March and May 2015 I was selling small quantities of stock and buying stable value funds. I was about 78/22 by end of May 2015. After that as the market went down I started buying more stocks. Today I moved 0.6 % of my net worth from bonds to stocks. As of now I am 90/10. Yes I am doing some market timing. I bought stocks from Oct 2008 to March 2009 and was handsomely rewarded for that. I hope that the same thing repeats, but of course nothing is guaranteed. I did add >$110,000 new savings over the last 11 months and as long as we are both working full time we do have the ability to save >10,000/ month. This ability to save makes me comfortable with having an aggressive stock : bond ratio.

Not exactly looking for any answers, but I have always learnt a lot from the opinions here and will follow any comments people want to make.
Ram
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