stock:bonds ratio -bogleheads equation taking age into account?

[Snydley]

I have seen a formula on the bogleheads board on asset allocation applied to some of the downturns in the market https://www.bogleheads.org/wiki/Asset_allocation. Applied to your allocation of 70% stocks and 30% bonds-- it would be -25.81% cumulative return after inflation from 2000-to-2002 bear market in a period of time that was marked by falling prices.
So, the question is--would you stay the course in this scenario or would you make adjustments?

Thanks this is very helpful! Hopefully I am calculating this correctly: We have 393k in retirement now, and in order to stay the course to reach our goal (assuming 5% avg. growth per year over 21 years) we need to contribute 33K/year. If there was a crash now similar to the 2000-2002 market we would lose ~25% of our retirement value- to 295K. If this happens we then have to contribute 41K/year to meet our goal.

In 2018, with employer contributions, DH and I will be contributing 60K into our retirement accounts. I think this means that for now we are ok at 70/30 as we can handle a crash if like 2000-2002. Does this sound right?

When DH decides to go to 1/2 time work I'll have to re-adjust everything.

[LivingAlmostLarge]

Yes. Just know that adding a bit of cash/bonds to a portfolio doesn't reduce return according to William Bernstein calculations. Hence why he said 80/20, 90/10 returns the same as 100 equities.

[scfr]

This plays into how much risk you are willing to accept which then drives your AA.

. . .

Right ... But I was really questioning why OP is only focusing on stocks & bonds in their asset allocation, and not considering cash (and possibly other assets).

It just seems like cash is the "Rodney Dangerfield" of asset allocation discussions (it gets no respect). I know that so much of the conventional wisdom is focused on stock:bond ratios, but I have a couple problems with that.

1. It seems to me that much of this stock:bond conventional wisdom is steered by entities that have the most to benefit from people investing in stock & bond mutual funds (just look at who pays to advertise in magazines like Money).

2. High net worth individuals tend to have a higher percentage of cash than you would expect if you listened to discussions that limit asset allocations only to stocks & bonds. Can you really argue that they are doing things all wrong? Here are a couple links for reference, one about international millionaires and one about high-(and ultra high)net-worth individuals in the USA.

https://www.bloomberg.com/news/articles/2017-09-28/here-s-where-the-most-millionaires-are-being-minted

http://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_WW_FindingsOverview_Broch_Final.pdf

[disneysteve]

Right ... But I was really questioning why OP is only focusing on stocks & bonds in their asset allocation, and not considering cash (and possibly other assets).

It just seems like cash is the "Rodney Dangerfield" of asset allocation discussions (it gets no respect). I know that so much of the conventional wisdom is focused on stock:bond ratios, but I have a couple problems with that.

Our AA as of 12/31/17 was 81% stock, 14% bond, 5% cash. Our portfolio value was just north of $1,000,000 so our cash position is about $50,000.

I don't think cash gets ignored. I think it just doesn't get talked about. When people talk about their portfolio, I think they are generally only referring to the money they have invested. They don't include their operating budget, emergency fund, or short term savings, all of which are held in cash. I'm sure very few if any folks have 0% cash. They aren't paying the electric bill by selling off shares of stock or redeeming bonds every month.

[Captain Save]

these financial rules of thumbs should be in the "worst financial advice" thread

[disneysteve]

these financial rules of thumbs should be in the "worst financial advice" thread

I think most rules of thumb are very good starting points. If everyone followed the most common ones, people would get into far less financial trouble. We've had a number of threads on the topic and this thread isn't the place for them but there are good rules of thumb for budgeting, investing, car buying, home buying, life insurance coverage, etc. Most people would be in way better shape if they adhered to those rules.

As for asset allocation, I just finished the adjustment to ours that I mentioned earlier. On 12/31/17 we were 81/14/5. We are now 70/26/4. I anticipate the cash portion climbing in the coming months as college expenses go away and we start adding to our cash reserves for future non-retirement needs but that's where we stand today.

[snafu]

When evaluating your risk ratio keep in mind government debt. Who are the top ten debtors in the bond fund?

http://www.usdebtclock.org/index.html

[Captain Save]

I think most rules of thumb are very good starting points. If everyone followed the most common ones, people would get into far less financial trouble. We've had a number of threads on the topic and this thread isn't the place for them but there are good rules of thumb for budgeting, investing, car buying, home buying, life insurance coverage, etc. Most people would be in way better shape if they adhered to those rules.

As for asset allocation, I just finished the adjustment to ours that I mentioned earlier. On 12/31/17 we were 81/14/5. We are now 70/26/4. I anticipate the cash portion climbing in the coming months as college expenses go away and we start adding to our cash reserves for future non-retirement needs but that's where we stand today.

THere are rules of thumb..and then there's this.. This is like a nice game to play with numbers. . Whenever this rule of thumb was introduced, the bond market was a different beast ..and that "game" never imagined that the bond market could change and the strategy will no longer be a viable one... At this time there's way too much risk and not enough reward..

[corn18]

THere are rules of thumb..and then there's this.. This is like a nice game to play with numbers. . Whenever this rule of thumb was introduced, the bond market was a different beast ..and that "game" never imagined that the bond market could change and the strategy will no longer be a viable one... At this time there's way too much risk and not enough reward..

I think you're missing the point of bonds. They are there to reduce downside risk, not make money. The 20 year bond bull market has people acting funky towards bonds.

60/40 could easily mean 60% equity and 40% very low risk. While bond funds NAV might go down when interest rates rise, you get more dividends. That's why you have to match the duration of the bond fund with your investment horizon. 5 years from retirement (like me) and I am holding short term bonds. Not a lot of upside, but not much downside either. I would be an idiot right now to hold a bond fund with an average duration of 15 years or even worse, 30 years, if I am 5 years from retirement. No chance to recover.