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Should I reallocate to a bond index or keep pumping into aggressive growth fund?

Started by jeff, January 03, 2019, 06:12:09 AM

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jeff

Hi friends,

I posed this question to Sam on the blog yesterday, but would be curious for your take.

I am in my low 30s and started investing in my 401K on Jan. 1, 2010. I've had a good run of it as we all have and I've been invested 100% in aggressive large and small cap growth funds. I intend to work until I'm 60-65 (not FIRE).

My question is, with the market certainly headed for a downturn, do I shift my allocations to a bond index fund and take the guaranteed return for a few years and skip the beating that's sure to come in some form -- or do I keep buying the aggressive funds? Yes, I'll get them at a discount, but I'll also stand to lose a lot of gains. Obviously I don't need the money any time soon, but does dollar cost averaging come into play here or would temporarily moving to bonds make me more money in the long run?

Cheers,
Jeff

Sam

Jeff - Cool you posted in the forums. Hope more folks chime in.

One thing to point out is the dollar amount. It is no big deal losing 20% - 35%, what many folks do in a bear market if we're talking relatively small amounts of money e.g. <$250,000. It will hurt, but your income will likely more than make up for the loss in just 1 year.

But as soon as you start losing more than a year's worth of income from your investments, that is when things start feeling hopeless. This reminds me I have to write a post on this exact topic.

So my question to you is: If you lose 30% of your portfolio's value, how many months of gross income is that? Net income would be worse.
Regards,

Sam

jeff

Quote from: Sam on January 03, 2019, 06:54:18 AM
One thing to point out is the dollar amount. ...

So my question to you is: If you lose 30% of your portfolio's value, how many months of gross income is that? Net income would be worse.

I don't want to overcomplicate, but I've never seen these two values compared so I want to make sure I'm clear. How many months of gross income...right now? Or how many months of gross income in retirement? If I lost 30% of my portfolio value right now, that's roughly five months of my current gross income.

Sam

Quote from: jeff on January 03, 2019, 07:06:30 AM
Quote from: Sam on January 03, 2019, 06:54:18 AM
One thing to point out is the dollar amount. ...

So my question to you is: If you lose 30% of your portfolio's value, how many months of gross income is that? Net income would be worse.

I don't want to overcomplicate, but I've never seen these two values compared so I want to make sure I'm clear. How many months of gross income...right now? Or how many months of gross income in retirement? If I lost 30% of my portfolio value right now, that's roughly five months of my current gross income.

30% of the value of your investments = 5 months of your current gross income is conservative. Carry on and invest I say!
Regards,

Sam

jeff

Quote
30% of the value of your investments = 5 months of your current gross income is conservative. Carry on and invest I say!

Interesting! So why do you make that recommendation? What is the connection between one's gross monthly income and 30% (or whatever %) of one's portfolio? I've never seen that type of calculus before and it's interesting to me.

Thank you, by the way, for sharing your wisdom!

Nigel

Quote from: jeff on January 03, 2019, 02:07:39 PM
Quote
30% of the value of your investments = 5 months of your current gross income is conservative. Carry on and invest I say!

Interesting! So why do you make that recommendation? What is the connection between one's gross monthly income and 30% (or whatever %) of one's portfolio? I've never seen that type of calculus before and it's interesting to me.

Thank you, by the way, for sharing your wisdom!

It's risk tolerance mostly.  I think I lost around $10K yesterday but given my time horizon historically it doesn't matter.  Still it's like a few weeks of net salary worth of loss in a day.

Sams point, I think, is when the portfolio get big enough that the losses become luxury car sized in a bad week and represents many months of earned income you may discover your stomach for risk wasn't nearly as high as you thought.  When the portfolio is small the percentage loss is the same but the absolute dollar amount is small enough to represent fewer months of income/savings.

Given the market is still one of the best ways to generate wealth with a small portfolio and a long time horizon you keep going because what the heck...stocks are discounted so this is when you're buying low.

With everyone jumping into bonds now is a meh time IMHO as you are buying higher.  You're trying to time the market...which has its own set of risks.

There's cold hard math and then there is emotion.  It's okay to be suboptimal in your allocations to keep your level of stress lower.  Me, I buy dividend kings when I get individual stocks just because getting checks makes me happy and more able to ignore market swings (the majority is in 10 index funds).  I also keep 20% bonds to even the swings out a bit.  But I did that slowly and not in reaction to the market...or more accurately, I did that reallocation when stocks was hot and not crashing.

I'd write down what your allocations should be then grin and bear it for this down cycle to wait for the next bull.  Somewhere in there, when you don't want to because the market is hot, reallocate...im going to have to do that...I want to get to 30-40% bonds since I'm 10 years from retiring...although the market may do that for me the way it's going.  If I had done it last year I wouldn't have to live with a little more volatility than I'd prefer at the moment but unless we end up with a 15 year hit I'm fine.

Even then I'm still fine.  I'll just work another year or two.