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  • Lordosis Lordosis 
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    Joined: 02/11/2019

    we also quibble about 100% equities mean.  if you have a solid cash reserve E-fund, you are not 100% equities, according to some definitions.

     

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    I have 6 months of expenses between checking and vanguard MMF.  Otherwise everything else in is US stock / international 80/20.

    I also think you need some bonds.  The reason is another 2008-9 selloff.  Until you have lived through something like this you do not know your risk tolerance.  I think 6% is fine.  Inflation????  I used to use 3-4% but now about 2%.

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    I agree it is easy to talk big when I have not seen the blood in the street.  However I have argued with myself that what is 10% in bonds really going to do.  OK I dropped 45% rather then 50% woo hoo!  I do not see the psychological benefit and if there is a financial benefit it is likely small.

    @peds I knew you would disapprove and so would a lot of others.  I am sure this has been hashed out plenty on the forum already but I am curious to your reasoning?  Is it the fact that I cannot rebalance?  Too much pressure in a big drop and I might sell low?  Bonds have to potential to outpace stocks for a moderately long time? 

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    and the last point is my favorite one:

    – for the 10 year period from 2000-2010 VTSAX returned 0%. with dividends.

    – VBTLX went up 80%.

    i also love to cherry pick data…

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    I do have a plan to work in bonds.  Just not yet.  I am aware there were stretches of I think up to 15 years where bonds beat stocks.  My plan now as written is adding in 10% bonds at age 40 or 1MM in investable assets whichever comes first.  I am rooting for the 1MM!

    You are almost certainly going to over save or under save.  The chance of you bouncing that last check the day you kick the bucket is infinitesimally small.  That also seems to be a very stressful way to spend those last days “am I going to make it?” but I guess it could add some excitement.   I would rather over save than under save, but that’s just me.  Spend as much as you need to to not worry about missing out on today in favor of tomorrow, and then let the rest do what it’s going to do.

    It’s fun to plan and all but the best laid plans of mice and men…

    That being said, I use 4-6% and look at the range when I do try to make projections.

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    I agree it is impossible to be precise.  I have a goal to be FI by 50.  At my current level of saving and if I can get 4% real return it is very doable.  Would I be disappointed with 52 or 53 no way! I am still way better off then most other people I know.  Also this is pretty conservative because I have tremendous daycare expenses right now and for the next several years.  I just do not want to bank on them going away because who know what new expenses await my future.  I would guess it will not be quite as expensive but time will tell.

     

     

    I fully anticipate the fact that nothing can be predicted this early.  I plan to constantly re evaluate as I go.  I am not worried about over saving and missing life.  We spend plenty of money and enjoy life.  It is just fun to make predictions and goals and hopefully obtain them.

    However I do think about how much of my funds I should direct to 529s.  I think I have a good balance now and will adjust as we go.  Obviously there are a tremendous amount of variables there.

     

    I appreciate all the comments.  If we all had the same notions and beliefs it would be a boring forum!

    “Never let your sense of morals prevent you from doing what is right.”

    #204897 Reply
    CordMcNally CordMcNally 
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    Joined: 01/03/2017

    I have similar thoughts on bonds as @lordosis. I’m currently about 7% in bonds but it might as well be 0% or 10%. Is that going to make or break my portfolio? Absolutely not. I think Warren Buffett has all the money he is going to give to his family in an S&P 500 fund. I’ll end up with more than I need so my mindset is actually one of investing more for future generations than myself. Unless I develop some kind of ridiculously expensive habits.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #204901 Reply
    Liked by Lordosis
    Lordosis Lordosis 
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    Status: Physician
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     Unless I develop some kind of ridiculously expensive habits.

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    That could be fun!

     

    Let me add that if someone asked me advise on AA I would not tell them 100% equity.  I know myself but I do not know anyone else quite so well.

     

    “Never let your sense of morals prevent you from doing what is right.”

    #204906 Reply
    Liked by Kamban, Dreamgiver
    Avatar docnews 
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    Joined: 01/09/2016

    I use 4% real.

    Super conservative but that is why the 4% withdrawal rate works. Obviously average has been higher but I have no idea my personal sequence of return risk will be.

    Good thing is with my hopefully necessary short career of under 20 years, savings rate is more important than return rate. 1/3 is interest at 4% for 20 years.

    For 4-5%: 10 years has 1/5 interest, 20 years has 1/3 interest, 30 years has 1/2 interest, 40 years has 2/3 interest.
    For 6-7%: 10 years has 1/4 interest, 20 years has 1/2 interest, 30 years has 2/3 interest, 40 years has 3/4 interest.

    #204947 Reply
    Avatar Tim 
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    https://institutional.fidelity.com/app/proxy/content?literatureURL=/9861502.PDF

    What is the difference between 45% and 50% loss?
    Quite honestly, the percentage doesn’t even matter. With a less agreesive allocation would 25% feel BETTER than 50%?
    The pain of losses are measured in YEARS, CARS, HOUSES. When you start seeing 10 years of hard work destroyed, some change their allocation and miss the benefits of being aggressive.

    10.3 vs 8.8% average returns? When you are 15 years into a 20 year plan, you will hear a little voice telling you, “I have to work 10 more years, not 5”.
    For 1.5% lower returns? Is that the bet you want to make? Of course you are different. Just like chasing returns on bonds is a foolish bet, use the data. It may save you $1mm or $2mm. AA leads to uncompensated risk.

    https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations?lang=en

    #204972 Reply
    Avatar Kamban 
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    Since I am young I do not have a very big portfolio it seems silly to me to make it overly complicated. I took a lot of convincing to add in international stocks. I realize that it is not that much more complicated to add in bonds but the funds available to me in my tax deferred accounts kinda stink so that also held me off. I somewhat see my human capital as a way to smooth the ride right now.

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    If you don’t want to add bonds ( I don’t have any) you should have

    1. strong will to never sell in a downturn an equity index fund. If you can hold it through highs and lows then you should have no problem.

    2. A source of income during the times when the stocks are down and not be forced to sell it at those bad times. A good paying job, some cash reserves or alternative sources of passive income (rental, business investments, dividends etc) that you can tap into might make this easy.

     

    If so, go for 100% stocks when you are young. Past 50-55 years age, transition into some bonds. No right or wrong way. Each person invests differently according to their ability to withstand a downturn.

    #204990 Reply
    Liked by Lordosis
    Lordosis Lordosis 
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    Joined: 02/11/2019

    If you don’t want to add bonds ( I don’t have any) you should have

    1. strong will to never sell in a downturn an equity index fund. If you can hold it through highs and lows then you should have no problem.

    2. A source of income during the times when the stocks are down and not be forced to sell it at those bad times. A good paying job, some cash reserves or alternative sources of passive income (rental, business investments, dividends etc) that you can tap into might make this easy.

     

    If so, go for 100% stocks when you are young. Past 50-55 years age, transition into some bonds. No right or wrong way. Each person invests differently according to their ability to withstand a downturn.

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    I like the way JL Collins puts it.

     

    Image result for jlcollinsnh toughen up cupcake

     

    I really doubt I will sell because I was scared.  I have proper insurance and as stable of a job as can be expected.  Plus I get about 10 emails a day for other jobs all over the country 😛  I have a 6 month E fund.  So I doubt I will be selling anything to cover expenses prior to retirement.  Also I have a wife who could return to full time if needed/wanted.

    “Never let your sense of morals prevent you from doing what is right.”

    #205002 Reply
    Liked by portlandia, Kamban, Tim
    IntensiveCareBear IntensiveCareBear 
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    Joined: 12/22/2018

    … 2. A source of income during the times when the stocks are down and not be forced to sell it at those bad times. A good paying job, some cash reserves or alternative sources of passive income (rental, business investments, dividends etc) that you can tap into might make this easy…

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    Why not learn to use the stocks themselves as income? That is what I was getting at in my response.

    For most people… it goes like this: nest egg builds up up up, they retire, nest egg goes up more, they slowly cash out stocks monthly or quarterly… but most of those redemptions are negated by growth of remaining shares. Then, WHOOPS… market always corrects, they now need to cash out more and more shares to get same income. Suddenly, their projectoins and standard of living are permanently lowered. That is not investing, that is called saving. It has its obvious pitfalls.

    In any down market, plenty of people will be willing to bet it is headed back up. Nobody knows when the bottom and the bounce will be. Enabling those bets can generate cash flow with no risks. That is investing. You need to be able to get at least trickle cash income from your investments… a bit more cash when necessary. That skill is significantly more important than avg annual growth %. Why not learn to write covered calls and use other market income strategies while the stakes are low… not when you’re retired and it is absolute necessity to make bills that month?

    "Hmm, that sounds risky." - motto of the middle class

    #205004 Reply
    Lordosis Lordosis 
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    Status: Physician
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    Joined: 02/11/2019

    … 2. A source of income during the times when the stocks are down and not be forced to sell it at those bad times. A good paying job, some cash reserves or alternative sources of passive income (rental, business investments, dividends etc) that you can tap into might make this easy…

    Click to expand…

    Why not learn to use the stocks themselves as income? That is what I was getting at in my response.

    For most people… it goes like this: nest egg builds up up up, they retire, nest egg goes up more, they slowly cash out stocks monthly or quarterly… but most of those redemptions are negated by growth of remaining shares. Then, WHOOPS… market always corrects, they now need to cash out more and more shares to get same income. Suddenly, their projectoins and standard of living are permanently lowered. That is not investing, that is called saving. It has its obvious pitfalls.

    In any down market, plenty of people will be willing to bet it is headed back up. Nobody knows when the bottom and the bounce will be. Enabling those bets can generate cash flow with no risks. That is investing. You need to be able to get at least trickle cash income from your investments… a bit more cash when necessary. That skill is significantly more important than avg annual growth %. Why not learn to write covered calls and use other market income strategies while the stakes are low… not when you’re retired and it is absolute necessity to make bills that month?

    Click to expand…

    If that is what you call investing then I will continue saving.  My guesses and market timing will likely just make matters worse.  In down market times I will like most tighten the belt a little but otherwise market corrections are built into the 4% rule.  It is not perfect but it is better then me guessing,

     

    Image result for its not only good it is good enough

    “Never let your sense of morals prevent you from doing what is right.”

    #205006 Reply
    Avatar ajm184 
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    That is investing.

    Click to expand…

    That is picking up nickels in front of this: https://www.cat.com/en_US/products/new/equipment/compactors/tandem-vibratory-rollers/1000027460.html

    Sure the roller is moving slowly, yeah your fast picking up those nickels, but only one misstep and you get run over and wiped out financially speaking.

    #205010 Reply
    Liked by Lordosis
    wonka31 wonka31 
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    I use 6% for my equity portfolio and 9% for my real estate portfolio. I’m roughly 50/50.

    The idea that someone posted about have some ‘income’ during a downturn is something I’m very focused on. I’m planning on setting and forgetting my equities and I hope to never touch them while living off of cash flow from real estate. This is subject to change, but we will see how it goes.

    #205027 Reply
    Avatar Tim 
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    Covered calls are a legitimate income generating strategy. Used most effectively on individual stocks however. Income certain with a risk of loss and a ceiling on gains with a specific time expiration. Underwater, at the strike price, and above, adds a few more variables. Just realize option traders dabble in this and you need to understand the “Greeks” and how valuation works.

    #205038 Reply
    CM CM 
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    medical school scholarship sponsor

    The historical mean return is based on the historical average valuation. When valuation is not equal to the historical mean, expected returns are not equal to the historical mean, just as the mean survival for someone with metastatic lung cancer is not equal to the national mean for that someone’s age and gender.

    Larry Swedroe recently alluded to a paper by Cliff Asness (Swedroe here: https://www.etf.com/sections/index-investor-corner/swedroe-expected-vs-realized-returns?nopaging=1 and Asness here: file:///C:/Users/Curt/Downloads/An%20Old%20Friend%20The%20Stock%20Markets%20Shiller%20PE%20(1).pdf ):

    “In a November 2012 paper, “An Old Friend: The Stock Market’s Shiller P/E,” Asness, of AQR Capital Management, found that the Shiller CAPE 10 provides valuable information. Specifically, he found 10-year-forward average real returns drop nearly monotonically as starting Shiller P/Es increase.

    He also found that, as the starting Shiller CAPE 10 ratio increased, worst cases became worse, and best cases became weaker. Additionally, he found that, while the metric provided valuable insights, there were still very wide dispersions of returns. For instance:

    • When the CAPE 10 was below 9.6, 10-year-forward real returns averaged 10.3%. In relative terms, that is more than 50% above the historical average of 6.8% (9.8% nominal return less 3.0% inflation). The best 10-year-forward real return was 17.5%. The worst 10-year-forward real return was still a pretty good 4.8%, just 2.0 percentage points below the average and 29% below it in relative terms. The range between the best and worst outcomes was a 12.7 percentage point difference in real returns.
    • When the CAPE 10 was between 15.7 and 17.3 (about its long-term average of 16.5), the 10-year-forward real return averaged 5.6%. The best and worst 10-year-forward real returns were 15.1% and 2.3%, respectively. The range between the best and worst outcomes was a 12.8 percentage point difference in real returns.
    • When the CAPE 10 was between 21.1 and 25.1, the 10-year-forward real return averaged just 0.9%. The best 10-year-forward real return was still 8.3%, above the historical average of 6.8%. However, the worst 10-year-forward real return was now -4.4%. The range between the best and worst outcomes was a difference of 12.7 percentage points in real terms.
    • When the CAPE 10 was above 25.1, the real return over the following 10 years averaged just 0.5%—virtually the same as the long-term real return on the risk-free benchmark, one-month Treasury bills. The best 10-year-forward real return was 6.3%, just 0.5 percentage points below the historical average. But the worst 10-year-forward real return was now -6.1%. The range between the best and worst outcomes was a difference of 12.4 percentage points in real terms.”

    The current CAPE 10 (or PE10) is about 31.38 (from Robert Shiller’s spreadsheet, available online).

    I generally estimate returns as the dividend yield plus about 1.55% (approximate LT real earnings growth from Shiller’s spreadsheet; Siegel found only 1.25%), so 1.96% + 1.55% = 3.51% (total real return). I then apply a haircut for a lower mean future valuation relative to today.

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #205039 Reply
    Liked by ENT Doc, Perry Ict
    fatlittlepig fatlittlepig 
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    The historical mean return is based on the historical average valuation. When valuation is not equal to the historical mean, expected returns are not equal to the historical mean, just as the mean survival for someone with metastatic lung cancer is not equal to the national mean for that someone’s age and gender.

    Larry Swedroe recently alluded to a paper by Cliff Asness (Swedroe here: https://www.etf.com/sections/index-investor-corner/swedroe-expected-vs-realized-returns?nopaging=1 and Asness here: file:///C:/Users/Curt/Downloads/An%20Old%20Friend%20The%20Stock%20Markets%20Shiller%20PE%20(1).pdf ):

    “In a November 2012 paper, “An Old Friend: The Stock Market’s Shiller P/E,” Asness, of AQR Capital Management, found that the Shiller CAPE 10 provides valuable information. Specifically, he found 10-year-forward average real returns drop nearly monotonically as starting Shiller P/Es increase.

    He also found that, as the starting Shiller CAPE 10 ratio increased, worst cases became worse, and best cases became weaker. Additionally, he found that, while the metric provided valuable insights, there were still very wide dispersions of returns. For instance:

    • When the CAPE 10 was below 9.6, 10-year-forward real returns averaged 10.3%. In relative terms, that is more than 50% above the historical average of 6.8% (9.8% nominal return less 3.0% inflation). The best 10-year-forward real return was 17.5%. The worst 10-year-forward real return was still a pretty good 4.8%, just 2.0 percentage points below the average and 29% below it in relative terms. The range between the best and worst outcomes was a 12.7 percentage point difference in real returns.
    • When the CAPE 10 was between 15.7 and 17.3 (about its long-term average of 16.5), the 10-year-forward real return averaged 5.6%. The best and worst 10-year-forward real returns were 15.1% and 2.3%, respectively. The range between the best and worst outcomes was a 12.8 percentage point difference in real returns.
    • When the CAPE 10 was between 21.1 and 25.1, the 10-year-forward real return averaged just 0.9%. The best 10-year-forward real return was still 8.3%, above the historical average of 6.8%. However, the worst 10-year-forward real return was now -4.4%. The range between the best and worst outcomes was a difference of 12.7 percentage points in real terms.
    • When the CAPE 10 was above 25.1, the real return over the following 10 years averaged just 0.5%—virtually the same as the long-term real return on the risk-free benchmark, one-month Treasury bills. The best 10-year-forward real return was 6.3%, just 0.5 percentage points below the historical average. But the worst 10-year-forward real return was now -6.1%. The range between the best and worst outcomes was a difference of 12.4 percentage points in real terms.”

    The current CAPE 10 (or PE10) is about 31.38 (from Robert Shiller’s spreadsheet, available online).

    I generally estimate returns as the dividend yield plus about 1.55% (approximate LT real earnings growth from Shiller’s spreadsheet; Siegel found only 1.25%), so 1.96% + 1.55% = 3.51% (total real return). I then apply a haircut for a lower mean future valuation relative to today.

    Click to expand…

    That’s really just another guess, Mumbo jumbo. No one knows, and there is no accurate model.

    #205041 Reply
    CM CM 
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    Status: Physician
    Posts: 1094
    Joined: 01/14/2017

    Here is a chart of current valuation metrics relative to their own historical means:

    Here is a graphical depiction of the inverse correlation between 10-year returns and starting valuations. The graph is inverted. For example, the 10-year nominal return following 2000 is negative:

    More details available here: https://www.advisorperspectives.com/dshort/updates/2019/04/02/market-remains-overvalued

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #205043 Reply
    Liked by Craigy, Perry Ict

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