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Tricia C.

How to Adjust Investment Choices/Mix with Age

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Hello,

I am seeking information on how to adjust my portfolio of mutual fund choices (or mix) to meet our age group. I know as we get older, more of our choices need to turn to more conservative funds. My husband and I are turning 45 this year, what percentage should we be investing in equities, and how much in other types of funds? 

The best option for me with my employer was Security Benefit NEA Direct Invest, and I've followed Ed LaFave's advice (Thanks, Ed!) and invested into the following funds: 
Vanguard Total Stock Market (at 52.5%), Vanguard Total International Stock Market (at 22.5%), and Vanguard Total Bond Market (at 25%).
Ed (and others) if you see this, I would love to ask you if these percentages would still work for me at 45.  And how should I adjust the percentages each year going forward? 

Some people take the "easy way" and purchase target-date mutual funds that self adjust as you get older. They of course carry a higher expense ratio, so I have tended to shy away from them. 

Finally, would the group have any additional resources they would recommend to facilitate this sort of planning?  

Thank you!!

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This Boglehead Wiki page discusses ways of thinking about your portfolio’s percentage of bonds, and lots of other related topics.

https://www.bogleheads.org/wiki/Bogleheads®_investment_philosophy

Ed is convinced that he can weather any stock downturn without giving in and selling (low). And he probably can. He’s an unusually rational guy, and has admitted that he may have some Asperger’s qualities to his personality. That can be a great asset.

Most advisors, professional as well as amateurs like us here, recommend SOME percentage of bonds in one’s portfolio. As mentioned in the BH philosophy, there are many factors that might justify an ability for a higher percentage of stocks. A couple might have 1 or 2 pensions, might both have social security, might expect an inheritance, . . . . .

There may not be a need to take more risk with more stock. And the emotional stress that results when there’s a big market drop may mean that there is no desire to experience a portfolio drop of say 50%.

For a couple with 20 years until expected retirement, I think your asset allocation of 75/25 is very reasonable. In 10 years you might pull back to 60/40?  There are no hard and fast rules for this stuff!? If you are two teachers with good pensions, you have a lot of options, including possibly early retirement. 

 

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My feeling is you could always follow the great John Bogle's advice and always have your age on bonds. I personally think that might be a tad too conservative at your age. If you are a teacher, and have a pension plan and you plan of staying in the profession to go on and collect your full pension you could go 100% stocks. If you and your husband are both teachers, you will have two pensions. So why buy bonds at all? Plus you will also have social security. Whats most important is that you save all you can in a low cost option. Steve Schullo who posts here   can probably be the best person to comment on bonds since he uses them effectively.

Target funds make great sense to me because they do the guesswork for you and adjust your allocation for you and they include bonds. True the fees are just a tad higher but worth it in that it self manages for you. I think investment  snobs like Ed  don't like them because they cost  more  but they can prevent you from making investment decisions that you might regret and cost you in other ways. It's my choice for most investors who want to keep it simple. Vanguard's are quite cheap.

If you couldn't stomach losing 50% of your portfolio adding  Bonds / cash can act as ballast and prevent that huge loss  from happening . If you have a weak stomach when the market goes South, better have a good bit of bonds. Incidentally before the corona virus hit the scene I shifted more into bonds on intuition that something bad might happen after a great market ride. As a result I lost very little of my portfolio's value but I don't recommend trying to  time the market.I think Krow's recommendations are good. And when I call Ed an investment snob I do not say it with any intended animosity.  Like Krow says there are no hard and fast rules. What's important is  that you understand the difference between stocks and bonds and how they behave in relationship to each other.

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11 hours ago, Tricia C. said:

I would love to ask you if these percentages would still work for me at 45

As I said in the other thread, I don’t see value in tying age to asset allocation. The “fun” part about your question is that the only person who can answer it is you.

Having 25% bonds means that when stocks have their value cut in half, your portfolio will drop about 37.5% instead of 50%. Of course you lower your long term expected returns in exchange for greater stability.

11 hours ago, Tricia C. said:

Some people take the "easy way" and purchase target-date mutual funds that self adjust as you get older. They of course carry a higher expense ratio, so I have tended to shy away from them. 

Vanguard and other institutions make no secret of exactly how their funds drift towards higher bond allocations. If you’d like to take the “easy way” without paying the higher fees you could copy what they do and manually shift your three fund portfolio towards bonds in the same way they do.

On average I think target date funds are best for most people. In the specific case though, I think people would be better served if they picked an allocation that works specifically for them. Still, for complex practical reasons, one size fits all is generally beneficial for the group as a whole in this case.

8 hours ago, krow36 said:

Ed is convinced that he can weather any stock downturn without giving in and selling (low). And he probably can. He’s an unusually rational guy, and has admitted that he may have some Asperger’s qualities to his personality. That can be a great asset.

That’s exactly right.

Full transparency: I’m 100% stocks, but I don’t recommend that for most people because most people allow their emotions to guide their decisions in a way I do not.

After losing 35% of my portfolio in a pandemic, I slept like an absolute baby (isn’t that a bizarre idiom since babies are notoriously terrible sleepers). I was 99.9% convinced that I was built to handle an all stock portfolio and now I’m 100% sure.

8 hours ago, krow36 said:

that might justify an ability for a higher percentage of stocks

Krow is referencing this need-ability-desire to take risk framework that is very popular with the bogleheads. The bogleheads are great, but this is another framework that makes no sense to me.

Suppose you’re 55 and you have a long way to go in terms of retirement savings. That means your need to take risk is high, but your ability to weather a 50% drop in your portfolio is low.

Suppose you’re 55 and you have a billion dollars. Now the inverse is true, your need to take risk is essentially zero and your ability is essentially infinite.

So need and ability always cancel each other out in this framework and you’re just left with desire.

8 hours ago, tony said:

when I call Ed an investment snob I do not say it with any intended animosity

I’m absolutely an investment snob in the sense that I want everybody (including myself) to have access to fully diversified funds at rock bottom costs and I’d ideally want people to make investment decisions based on cold logic and math.

In the end though, I don’t have the interest to look down on people who behave differently. In fact, if most everybody went with expensive actively managed funds and sold during crashes only to buy back in after recoveries, I suspect that would benefit me. So to each their own 😈

 

8 hours ago, tony said:

Ed  don't like them because they cost  more  but they can prevent you from making investment decisions that you might regret and cost you in other ways.

I would never use a target date fund, but I think target date funds or fixed allocation funds like Vanguard’s LifeStrategy line up are ideal for the typical investor and I’m very happy they exist.

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It's always nice to hear different view points on the matter. Thank you for all the information and helpful discussion! I certainly have much reflection to do over the next several months as I decide what to do with my current allocations. Thanks again, gentlemen, and have a lovely weekend! 🌞

 

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I like that Bogleheads philosophy link.

https://investor.vanguard.com/investing/how-to-invest/investment-risk
Vanguard has a neat chart under "Adding bonds tends to lower both risk and potential return" if you scroll down that link.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
You can look at the historical return of some of the models (economic conditions have changed a lot over time though) to target an average return that allows you to meet your retirement goals. Your goals dictate what you should be doing - More conservative allocations may delay your ability to retire. More aggressive allocations may introduce more risk than necessary.

At a recent Vanguard client education event, an advisor really didn't see an advantage of being more than 80% in stocks. Risk outweighed potential rewards in their view. I'm finding that having a some % of bonds helps by allowing for rebalancing in good and bad times.

We'd probably have to know more about your expenses, projected expenses in retirement, date you plan to retire, pension income, social security income, other sources of income and yadda, yadda, yadda to really know what's appropriate for you. If you're sleeping well, you're probably alright.

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13 hours ago, ScottO said:

I like that Bogleheads philosophy link.

https://investor.vanguard.com/investing/how-to-invest/investment-risk
Vanguard has a neat chart under "Adding bonds tends to lower both risk and potential return" if you scroll down that link.

https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations
You can look at the historical return of some of the models (economic conditions have changed a lot over time though) to target an average return that allows you to meet your retirement goals. Your goals dictate what you should be doing - More conservative allocations may delay your ability to retire. More aggressive allocations may introduce more risk than necessary.

At a recent Vanguard client education event, an advisor really didn't see an advantage of being more than 80% in stocks. Risk outweighed potential rewards in their view. I'm finding that having a some % of bonds helps by allowing for rebalancing in good and bad times.

We'd probably have to know more about your expenses, projected expenses in retirement, date you plan to retire, pension income, social security income, other sources of income and yadda, yadda, yadda to really know what's appropriate for you. If you're sleeping well, you're probably alright.

 

Tricia,

I like VG and Bogleheads philosophy also. Both have done great things for over 20 years (Bogleheads) to help us ordinary folks get a s at Wall Street using Vanguard index funds: Reasonable returns with reasonable risk with rock bottom costs and core asset classes. Nothing fancy, just plain and ordinary investing in the broadest and most diversified stock and bond market indices around the world. How cool is that! I have saved so much in fees it has paid for a lot of good stuff in my retirement life. I used that model portfolio allocations years ago to set up my stock-bond split that is suitable for my willingness to take equity risk and the need for the $$ for retirement. 

There are a number of Bogleheads who take 100% stock allocation for years and are perfectly happy with the volatility. 

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The Efficient Frontier graph can be helpful when trying to balance risk vs. reward.  The  -axis is expected return (although it seems too high) and the Y axis is volatility/risk.  For most people the sweet spot is in the 60-70 stock zone where you get the most return for the risk level.    The main takeaway for me is that anything more than about 75% bonds actually increases risk while reducing return, and as you approach 100% stock, risk increases considerably more than return.  As others have said it is ultimately a very personal decision based on a great number of factors.

 

The Efficient Frontier

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Wow. Thanks, MNGopher. That is what I am learning--it is a very personal decision. The resources and discussion all help me to formulate one that I can feel confident about. Thank you!

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1 hour ago, MNGopher said:

The  axis is expected return (although it seems too high) and the Y axis is volatility/risk.  For most people the sweet spot is in the 60-70 stock zone where you get the most return for the risk level.    The main takeaway for me is that anything more than about 75% bonds actually increases risk while reducing return, and as you approach 100% stock, risk increases considerably more than return. 

I found that main takeaway to be very counterintuitive. It’s interesting that a 0% stock portfolio is actually more volatile and lower performing than a portfolio with somewhere around 25% stocks. However the other extreme, 100% stocks, still meets my expectations for being the highest performing.

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13 hours ago, EdLaFave said:

I found that main takeaway to be very counterintuitive. It’s interesting that a 0% stock portfolio is actually more volatile and lower performing than a portfolio with somewhere around 25% stocks. However the other extreme, 100% stocks, still meets my expectations for being the highest performing.

Yes, 100% stock had better performance than 70%, but it was less than 1% better (for this particular time period), while taking on considerably more risk.

I am also in a higher allocation of stocks than is typically recommended for my age.  The thing I don't like about 100% though, is it's tough to rebalance during sharp downturns like we've had this year.  During Bull markets rebalancing is a preservation/safety move, but during Bear markets rebalancing from bonds to stocks can improve performance.

 

 

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This is maybe a bit philosophical/semantic, but in this context  I prefer to use the word volatility rather than risk. In my mind at least risk has a connotation of irreparable loss that you might suffer from investing in a single stock whereas volatility has a connotation of large/temporary market swings you expect from a total market index fund.

It’s hard to tell how close it is to 1%, let’s call it 0.8%. I personally view this the same way I view fees and a 0.8% fee is huge! Of course it is easy for me to say that because I don’t mind volatility.

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8 minutes ago, ScottO said:

@EdLaFave Do you plan on staying 100% stock in retirement while you're drawing down? 

Absolutely. In the context of retirement, the "risk" that I'm afraid of isn't volatility, it's the likelihood of running out of money.

I like to use this chart (also shown below) from from the early retirement now blog as a rough approximation of that "risk".

Please feel free to critique or poke holes in my logic!

 

swr-part2-table1.png

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