Asset Allocation by "Enough"

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slowandsteadywins
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Asset Allocation by "Enough"

Post by slowandsteadywins »

https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
BitTooAggressive
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Re: Asset Allocation by "Enough"

Post by BitTooAggressive »

Your willingness to take risk is more. It’s silly to try and quantify it like that in such a simplistic chart.

Some investors want to maximize wealth for a given risk they are willing to bear. Some want to pass on wealth to future generations or causes.

The world is complex and people like a big safety margin. What looks like enough today might not be enough tomorrow.

There are hundreds of reasons a chart like that won’t work or capture how people will behave.
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burritoLover
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Re: Asset Allocation by "Enough"

Post by burritoLover »

slowandsteadywins wrote: Fri May 26, 2023 10:23 pm https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
I like that idea. It is as good as anything else. I like that the whitecoatinvestor actually put some numbers on a page rather than just presenting that a nebulous concept.
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Re: Asset Allocation by "Enough"

Post by KRP »

slowandsteadywins wrote: Fri May 26, 2023 10:23 pm https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
As one accumulates, it seems to me willingness and ability to take on risk can actually rise at the same time need to take risk drops, and the goals ("enough") also change with age/family dynamics.

I was definitely investing most conservatively when I had barely built up an emergency fund as a youngster than I am now that I have a bigger buffer.

I guess I did that list backwards?...
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burritoLover
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Re: Asset Allocation by "Enough"

Post by burritoLover »

It is also interesting if you continued to apply this during a market downturn, you could move to a higher stock allocation during that time.
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JPH
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Re: Asset Allocation by "Enough"

Post by JPH »

The basic idea will appeal to some investors. But I'll bet the exact numbers are off the top of someone's head.
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burritoLover
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Re: Asset Allocation by "Enough"

Post by burritoLover »

JPH wrote: Sat May 27, 2023 11:09 am The basic idea will appeal to some investors. But I'll bet the exact numbers are off the top of someone's head.
Sure, as is any derivation of how much bonds to hold (age in bonds, age -20 in bonds, etc).
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goingup
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Re: Asset Allocation by "Enough"

Post by goingup »

In reading the article, this glide path idea is just one of 7 that Jim presents. It may be a good fit for some investors, but it's not how we're gliding. :D We picked an AA several years ago and now in retirement are just drifting around 60/40. Not rebalancing.
Random Walker
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Re: Asset Allocation by "Enough"

Post by Random Walker »

I like the concept too. I think we can do better than a simple age based glide path where we take 1-2% off equity allocation each year. Equities have an SD in the range 15-20%. As one approaches retirement and he’s lucky enough to see some big returns, why not take some big definitive steps to take risk off the table. Can’t recommend strongly enough William Bernstein’s short ebook on Life Cycle Investing. Murphy’s Law of Retirement really got my attention!

Also this thread reminds me of these posts from the past:

viewtopic.php?t=236967

viewtopic.php?t=220275

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slowandsteadywins
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Re: Asset Allocation by "Enough"

Post by slowandsteadywins »

What I like about this method:
  • As one's "target #" or Financial Independence # changes, so too does the adjustment of need for risk
  • As markets change, one's AA may become more aggressive/risk (equities) or less (bonds).
  • Seems more relevant as a method for need for and ability to take risk than age alone.
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Taylor Larimore
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Re: Asset Allocation by "Enough"

Post by Taylor Larimore »

Bogleheads:

In my opinion it is impossible to select the perfect asset-allocation which depends on our goals, time-frame, age, health, outside resources, etc..

Vanguard has a simple Asset-Allocation Tool which will work for most of us. This is the link:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
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delamer
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Re: Asset Allocation by "Enough"

Post by delamer »

I feel that I need to know more about the bond portion of these portfolios, before opining.

Vanguard Total Bond is different than a short-term Treasury ladder.
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Jeepergeo
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Re: Asset Allocation by "Enough"

Post by Jeepergeo »

I suspect that many that have carefully built enough over time by taking on and managing some risk will find it to be a challenge to themselves to reduce risk to very low or near zero.

That said, the OP raises an important point that deserves considerable refelection. And I like the table that was presented as it illustrates the concept quite well.
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Re: Asset Allocation by "Enough"

Post by DSBH »

slowandsteadywins wrote: Fri May 26, 2023 10:23 pm https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
Interesting. Could there an “Increase Stocks by Percent of “Enough””, e.g.

200% = 40% stock

700%+ = 95% stock ?
John C. Bogle: "Never confuse genius with luck and a bull market".
longinvest
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Re: Asset Allocation by "Enough"

Post by longinvest »

slowandsteadywins wrote: Fri May 26, 2023 10:23 pm https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
Slowandsteadywins, the stock-and-bond market has a balanced allocation. Some people like to tilt their portfolios, concentrating their portfolios into specific parts of the stock and bond markets. Personally, I haven't been convinced by emotional arguments to tilt my portfolio towards bonds or towards stocks. The market's balanced allocation suits me. I only accept a moderate home bias (chosen by Vanguard, the provider of my all-in-one ETF) because of the obvious higher risks and costs of foreign investing.

So, about the idea of decreasing stocks based on wealth, I remain unconvinced of the idea of betting mostly on stocks, early in one's life when poorer, in hope that stocks will outperform while one is younger, and reducing stocks later fearing that stocks might perform badly once one is older and wealthier. I think that the neutral investing approach is to adopt a balanced allocation all lifelong and spend a little less when younger. See this earlier post for a mathematical argument.
Last edited by longinvest on Sun May 28, 2023 6:51 am, edited 1 time in total.
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abc132
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Re: Asset Allocation by "Enough"

Post by abc132 »

If everyone agrees Warren Buffet at 90/10 is fine then we should dispense with single-metric methods for determining AA. This is not a problem with global maximums or minimums based on any one metric.

If you have a fixed AA and you receive outsized returns you already have an outsized amount of fixed income. If you throw a few percent additional fixed income each year on top of that you have something that is much more likely to succeed.

An improvement is to modify this to be AA vs portfolio size instead of an aged-based plan. This implies you know where you are now and you know where you want to be in retirement. Modify this to hold 10% more stock allocation while you are still working can also make sense as you have more risk tolerance with an income than without an income.

Going from 70/30 to 30/70 in one year is a sure sign of a poor plan or of a lack of planning. This type of move is almost guaranteed to increase risk of portfolio failure. That outsized risk may be in the future or it may have been taken in the past.
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slowandsteadywins
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Re: Asset Allocation by "Enough"

Post by slowandsteadywins »

Taylor Larimore wrote: Sat May 27, 2023 12:40 pm Bogleheads:

In my opinion it is impossible to select the perfect asset-allocation which depends on our goals, time-frame, age, health, outside resources, etc..

Vanguard has a simple Asset-Allocation Tool which will work for most of us. This is the link:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "Choose a balance of stocks and bonds according to your unique circumstances--your investment objective, your time horizon, your level of comfort with risk, and your financial resources."
Not seeking perfect, seeking sound and logically informed. The Vanguard tool incorporates need and ability to take risk based on age of retirement and time left towards goal, etc. Wouldn't percentage of current assets towards target (%s) be a good way to determine need to take risk for expected return? This seems equally good, if not better, than an age alone.
"Nothing in this world can take the place of persistence; Persistence and determination alone are omnipotent." | -Calvin Coolidge
ebeb
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Re: Asset Allocation by "Enough"

Post by ebeb »

Taylor Larimore wrote: Sat May 27, 2023 12:40 pm Vanguard has a simple Asset-Allocation Tool which will work for most of us. This is the link:

https://retirementplans.vanguard.com/VG ... -OX77-OGQQ
My current allocation is 70/30. after taking this questionnaire it is telling me to go to 50/50 I am bit puzzled now 😕
80% VOO | 20% BND+TBILL+CASH | Don't believe Nobody because Nobody knows nothin' - Anon
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sf_tech_saver
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Re: Asset Allocation by "Enough"

Post by sf_tech_saver »

slowandsteadywins wrote: Fri May 26, 2023 10:23 pm https://www.whitecoatinvestor.com/desig ... lide-path/
Decrease Stocks By Percent of “Enough”

However, why should time be an important factor at all? I mean, the real way to determine an asset allocation depends on your need, ability, and willingness to take risk. Someone who has almost enough to be financially independent has a whole lot less need to take risk than someone who only has 1/4 of their “number.” For example, perhaps the glide path looks like this:

0-10% = 100% stock
11-30% = 80% stock
31-60% = 70% stock
61-90% = 60% stock
91-110% = 50% stock
111%-150% = 40% stock
151%+ = 20% stock
Thoughts on this? To me, it seems intuitive to take the risk that is needed for the goal - in this case, having what I need to be financially independent - and no more.
I think this is completely wrong! Once you hit 150% of what you need the threat of a 30% decline in equities isn't even a huge risk, and you might even be able to survive on the dividends with some belt-tightening!

If anything, I think Warren Buffet's 90/10 AA is ideal once you are over 10M in holdings, as the historical fluctuations of even VOO at that point can't put you out of business.

Winning big also reduces existential risks, the BH approach isn't investing in individual stocks that can literally go out of business. Once you can survive a 40% decline in equities and keep going its hard to even imagine a real 'risk' that exists beyond fluctuations in lifestyle.

My two cents -- over the long haul nothing reduces risks like equities.
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Re: Asset Allocation by "Enough"

Post by djm2001 »

The glide path from Gordon Irlam's Simple Rules of Thumb for Investing is more reasoned and justified:

Code: Select all

Stocks% = MIN(50% * Need / Have, 100%)

Have/Need	Stocks%
0%		100.0%
50%		100.0%
60%		 83.3%
70%		 71.4%
80%		 62.5%
90%		 55.6%
100%		 50.0%
Image

The formula purports to be an approximate solution to Merton's portfolio problem. The intuition is to target an allocation of 50% stocks in the final target portfolio, filling up the stocks portion first along the way. This assumes a stable salaried job. If part of the job compensation comes in the form of stocks (e.g., restricted stock options), it changes the equation and we'd allocate more to bonds earlier on.
Last edited by djm2001 on Mon May 29, 2023 1:09 pm, edited 1 time in total.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Asset Allocation by "Enough"

Post by N.Y.Cab »

I think having 10 year of expenses in bonds is enough. That's 40% in a typical retirement portfolio size of 25x. With a bigger portfolio, that 10x would be a smaller percentage, for example 20% in a 50x portfolio.
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Re: Asset Allocation by "Enough"

Post by Nowizard »

A related question is whether "enough" should always include reducing risk. For example, if "enough" includes SS and a pension that are either sufficient to fund retirement or nearly so with small amounts from invested assets, some might continue to take greater risk to potentially increase legacy amounts for various reasons.

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Re: Asset Allocation by "Enough"

Post by Wwwdotcom »

Maybe a glide between 70% and 40% in stock if necessary. Is someone really reducing risk by allocating more than 60% into bonds (or any possible asset class)??
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Re: Asset Allocation by "Enough"

Post by JackoC »

djm2001 wrote: Mon May 29, 2023 5:53 am The glide path from Gordon Irlam's Simple Rules of Thumb for Investing is more reasoned and justified:



Have/Need Stocks%

100% 50.0%
The formula purports to be an approximate solution to Merton's portfolio problem. The intuition is to target an allocation of 50% stocks in the final target portfolio, filling up the stocks portion first along the way. This assumes a stable salaried job. If part of the job compensation comes in the form of stocks (e.g., restricted stock options), it changes the equation and we'd allocate more to bonds earlier on.
Interesting, though it is basically the same at 100% of need as the 'off the top of head' numbers (perhaps, maybe the author can comment, he posts here sometimes) of the first one. Also the solution to the Merton portfolio problem given in that Wiki article, the Merton fraction, depends only on the equity risk premium, standard dev of equity return, and a personal risk aversion factor (given as 'gamma' there) assumed in theory not to depend on wealth (or age): neither wealth or age themselves appear directly in the solution*. Still, whatever Irlam did to get a curve depending on wealth, it looks more reasonable/practical to me than the OP table in that it seems ready to level out not far past 100% 'need'. A very low stock allocation at only 150% of person need doesn't seem reasonable to me. In real life, bequest is not an issue when you're young and far from your own financial goals. Later in life *if* you exceed original financial goals and have heirs (you like), it is and may become the main reason not to have very low stock allocation. In theory a probability weighted 'need' for bequest might be incorporated upfront but it's not practical IMO. Anyway I see the entries in the OP table above 100% need as more questionable than the ones below 100%, which is generally consistent with Irlam's graph.

*Merton fraction=ERP/(vol^2*gamma). This would always get back to the perennial debate here what stock expected return or expected ERP is, and as usual 'there's no such thing' would be nonsensical, people assume something for expected return no matter how vehemently they reject or refuse to understand the term. However valid estimates of E[r] can vary. I'd say global stock E[r]=~4% real now, use 1.5% real as riskless, 19% was the historical avg VIX inception to date, a wiki article linked to that one says empirical study found gamma (referred to as eta in the other article) around 1.4 in OECD countries. That would give Merton fraction 2.5%/((.19^2)*1.4)=voila, ~50%. :happy But return optimists might get a higher still reasonable estimate of stock E[r], below the common but non-reasonable estimate 'stock expected return=avg past realized return regardless of past starting valuation v now'. And gamma is supposed to vary by individual, you can't tell somebody what their gamma is. I'm not saying this equation is practically useful necessarily, it's not how I've determined allocation.
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Re: Asset Allocation by "Enough"

Post by ebeb »

This formula is not making sense: Stocks% = MIN(50% * Have / Need, 100%)
Say I have 50% of what I need so have/need = 50%.
Stocks% = MIN(50% * 50%, 100%) = MIN(25%, 100%) = 25% not 100.0% as shown in the table :annoyed
80% VOO | 20% BND+TBILL+CASH | Don't believe Nobody because Nobody knows nothin' - Anon
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Re: Asset Allocation by "Enough"

Post by djm2001 »

ebeb wrote: Mon May 29, 2023 12:43 pm This formula is not making sense: Stocks% = MIN(50% * Have / Need, 100%)
Say I have 50% of what I need so have/need = 50%.
Stocks% = MIN(50% * 50%, 100%) = MIN(25%, 100%) = 25% not 100.0% as shown in the table :annoyed
You're right. The formula should be "Need / Have", not "Have / Need". Fixed my post above.
AA = global stocks & bonds @ market weight (~60/40); EF = i-bonds; WR = -PMT(1%, 100-age, 1, 0, 1)
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Re: Asset Allocation by "Enough"

Post by 20cm »

DSBH wrote: Sat May 27, 2023 5:08 pm Could there an “Increase Stocks by Percent of “Enough””
That is the conclusion I came to when I went through the thought process years ago. For example: at 500% of enough, with the 'enough' in 60/40 stock/fixed and the 400% 'past enough' all in stock I would land at a minimum of 92%* stock. Any other conclusion means you are either changing the desired margin of safety or changing the desired safe withdrawal amounts, which are both perfectly fine variables to change but I believe it's good to be clear about what you are changing and why.

(*92% comes from (60+400)/(100+400), a pessimistic oversimplification as the portfolio's aggregate stock allocation can be higher since the 'past enough' portion also has its own SWR contributing to the total safe withdrawals)
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Re: Asset Allocation by "Enough"

Post by ebeb »

20cm wrote: Mon May 29, 2023 1:24 pm (*92% comes from 60/100 + 400/400, a pessimistic oversimplification as the portfolio's aggregate stock allocation can be higher since the 'past enough' portion also has its own SWR contributing to the total safe withdrawals)
If I have 500% of need. Then will just keep 100% in safe money and put 400% in stocks giving 80/20 asset allocation until you need to replenish the 100% due to withdrawals. :shock:
80% VOO | 20% BND+TBILL+CASH | Don't believe Nobody because Nobody knows nothin' - Anon
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Re: Asset Allocation by "Enough"

Post by DSBH »

20cm wrote: Mon May 29, 2023 1:24 pm
DSBH wrote: Sat May 27, 2023 5:08 pm Could there an “Increase Stocks by Percent of “Enough””
That is the conclusion I came to when I went through the thought process years ago. For example: at 500% of enough, with the 'enough' in 60/40 stock/fixed and the 400% 'past enough' all in stock I would land at a minimum of 92%* stock. Any other conclusion means you are either changing the desired margin of safety or changing the desired safe withdrawal amounts, which are both perfectly fine variables to change but I believe it's good to be clear about what you are changing and why.

(*92% comes from (60+400)/(100+400), a pessimistic oversimplification as the portfolio's aggregate stock allocation can be higher since the 'past enough' portion also has its own SWR contributing to the total safe withdrawals)
92/8 (or 90/10 ...) AA sounds good to me with 500% of "Enough". I might have 90% in Total Stock Market and 10% in short-term Treasuries, and use a portion of the annual ~1.5% distribution from Total Stock Market to support living expenses.
John C. Bogle: "Never confuse genius with luck and a bull market".
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