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Should my liquid assets be 100% invested in stocks?

Started by Money Ronin, October 29, 2018, 06:13:19 PM

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Money Ronin

Sam provides sound sound advice in this article (https://www.financialsamurai.com/suggested-stock-allocation-by-bond-yield-for-logical-investors/) where he advises re-allocating your mix of bonds vs. stocks based on risk profile and bond rates.  I've seen similar charts before where one's average return and volatility increase as stock % increases.  Historically, I have been an aggressive investor with 90%/10% stocks to bonds.

My question is this:  If someone has a somewhat stable and sufficient source of income (e.g., pension, rental income, wealthy spouse, etc.) and long time horizon (because these funds are in excess of what is needed to cover basic living expenses), shouldn't assets be invested 100% in stocks to maximize return?  Is there some efficient frontier where having a greater % of stocks does not increase return vs. a mixed portfolio.

Sydney

Intriguing question. I can see where your thought process is coming from. For me personally, I'm not comfortable with 100% in stocks even with a long term horizon. I suppose one of the risks of going all-in stocks is the risk of how the markets could be performing during that time in the long term future when you're planning on needing that money. If there's a long recession leading into/during the time period when you plan on needing the funds, your accounts could really suffer. On the flip side, they could be performing crazy well. I'm certainly no expert though. Risk tolerance is quite a personal thing too.

polama

There have been reasonably long periods where bonds outproduce, and bonds can be a form of "dry powder" where you're rebalancing into a decline to catch more of the upside, but if the future is like the past 100 years, you've got higher expected returns at 100% stock.

The caveat, though, is that selling stock at the depth of a recession/depression destroys your wealth. And that's when your pension is most likely to dry up as your former employer goes belly up, or your rental income vanishes as the renters lose their jobs, or your wealthy spouse isn't quite so rich as before. So if you can definitely wait out the hard times 100% is fine, but the expected gains aren't that much higher and it's easy to overestimate the stability of income streams.


Money Ronin

Thank you for the responses so far.  I'm very bad at re-allocating my portfolio--I'm more of a set it and forget it kind of investor.  That also means I'm really good at staying the course even when the stock market tanks.  I am more likely to go into extreme belt tightening mode before selling when the market is down.

polama

How bad at re-allocating your portfolio?

If you're going to set one mix and ride it for the next 30 years until you need the money, I'd go more conservative if anything. Completely defensible to say "100% stock, I've got a very long horizon", IF you're going to pull back as the horizon gets closer.

People will have different opinions, but I think if you can commit to reevaluating your allocation every 5-10 years it's fine.

Money Ronin

Quote from: polama on October 30, 2018, 02:18:54 PM
How bad at re-allocating your portfolio?

If you're going to set one mix and ride it for the next 30 years until you need the money, I'd go more conservative if anything. Completely defensible to say "100% stock, I've got a very long horizon", IF you're going to pull back as the horizon gets closer.

People will have different opinions, but I think if you can commit to reevaluating your allocation every 5-10 years it's fine.

I'm definitely talking about funds that I may never need assuming my retirement income can be funded by another source.  As an example, my kids' 529 plans are invested in a target date fund because there will be a specific need at a specific time.

I review my investments several times a year, but due to tax consequences, laziness and unwavering confidence in my inability to predict the market, I rarely make any changes.  Every few months, if I have cash, I may buy more stocks.  Currently I'm sitting on some cash, but once I buy in, I usually don't ever get out, except on the rare occasion I need cash to buy real estate. 

TravelGirl

What if you simplified the balancing for you by adding a bond fund.  Then you don't have to worry about the buying and selling of bonds as the fund manager it will take care of it and you adding some safety into your portfolio.

Sam

There is actually an efficient frontier to consider when investing. Check it out: https://www.financialsamurai.com/investment-strategies-for-retirement-based-on-modern-portfolio-theory/

You will eventually get to a point of your life where the AMOUNT you invest will no longer feel comfortable getting fully exposed to stock market sequence risk.

For example, let's say you have $100,000 in stocks. You don't really care about losing $20,000 because you're making $70,000 a year and can easily make up for it.

But let's say you grow your portfolio to $1,000,000. You have a family to provide and you're making $200,000 all-in. If you lose $200,000 in stocks, you will feel extremely stressed because your $200,000 is only about $150,000 after tax.

And if your stock portfolio grows to $5,000,000, there's no reason to risk it all because you have an amount that allows you to never have to go back to work again.

Regards,

Sam

Money Ronin

Quote from: Sam on November 01, 2018, 05:48:30 AM
There is actually an efficient frontier to consider when investing. Check it out: https://www.financialsamurai.com/investment-strategies-for-retirement-based-on-modern-portfolio-theory/

You will eventually get to a point of your life where the AMOUNT you invest will no longer feel comfortable getting fully exposed to stock market sequence risk.

For example, let's say you have $100,000 in stocks. You don't really care about losing $20,000 because you're making $70,000 a year and can easily make up for it.

But let's say you grow your portfolio to $1,000,000. You have a family to provide and you're making $200,000 all-in. If you lose $200,000 in stocks, you will feel extremely stressed because your $200,000 is only about $150,000 after tax.

And if your stock portfolio grows to $5,000,000, there's no reason to risk it all because you have an amount that allows you to never have to go back to work again.

Thanks so much for the link--I've heard Prof Benartzi speak before.  I am familiar with the efficient frontier theory but I am applying it somewhat unconventionally.  The conventional advice is to increase bond exposure as one ages.  However, I disagree for specific circumstances. 

I know people who are near retirement or retired who have government pensions and free healthcare for the rest of their lives.  Their incomes and expenses are relatively fixed at this point and sufficiently covered.  Then on top of that they have investable funds which exceed anything they need to pay for daily expenses.  These funds will likely go to their kids or charity at some point in the future.  If that is the case, why not maximize growth and continue to be aggressively invested?

I won't have a government pension, but I hope to be in a position in a few years where my real estate holdings provide sufficient cash flow to cover my daily expenses.  When that happens, I too, expect to continue aggressively investing my other funds (e.g., 100% in stocks) to maximize return. 

In the examples I provided a conservative allocation would leave money on the table for funds that are not going to be needed in one's lifetime.  I'm really thinking about investing for future generations like an endowment fund strategy. 

If my projections are wrong, and I need to dip into this endowment fund to my expenses in old age, then so be it. I'm willing to take that chance because historically the probability of a bull versus a bear market is in my favor.  Also I wouldn't be cashing out 100%--just what I need to make it through a tough period.

I'm definitely looking for people to poke holes in this strategy because it is unconventional.  Many people put a premium on "sleeping better at night" but the performance of the stock market has never kept me up at night.  Now that I've lived through 2009 and have seen what happens over the long term, I'm prepared to ride things out.

numbers

Hi Money Ronin,
I find myself in the exact same situation as you describe.
I have been all in - 100% invested in equities for the last 30 years of my working life.
Recently retired, I set aside 3 years of potential living expenses in fixed income investments, now I am only 95% invested in equities.
My rational is the same as yours, and I appreciate reading your analysis.