Right up front: I am not from the US! I am posting here, because there is much response in this forum, and because I am not sure if it makes a difference.
I am in my late 40’s and during the accumulation phase, have kept a 100% global stocks portfolio (MSCI ACWI). Recently I have reached the point of FI. So, technically I could retire, but probably I will continue working for at least 2 till 3 years. Maybe even longer (but decreasing my hours as I go). Mainly because I (still) like my job. Secondary, it gives me a bit of extra safety.
I am thinking of keeping my portfolio 100% stocks, even when I retire. I know. Most advice against it. There are all kinds of rule of thumb, like your age in bonds, or somewhere in the range of 60/40 to 75/25. Most of recommendations are geared to US investors. I wonder what makes sense in my situation:
Goal & horizon: to bridge 10 to 15 years until pension kicks in![:-)]( "Smile")
Risk tolerance: I find this the hard part to answer. If I run my numbers in a FIRE calculator, with 100% stocks it gives me a success change of 97% with my current portfolio value to spending ratio (if I quit right today. Which I am not planning). If I do a 60/40% portfolio, it’s about 99%. This difference is very minor. If I slowly transition into retirement and quit after 2 till 3 years, the success chance with all stocks portfolio is 99%, and with a balanced portfolio 99,6%. So, the difference is even less. Is there still any point of keeping bonds?
The paper The Retirement Glidepath: An International Perspective argues not. According to his data, the failure rate of a World portfolio with 100% stocks has over a 30 year period 6,2% failure rate, and a 60/40% portfolio 16% (Table 3). The constant 100% stocks performs also better than a dynamic allocation some people propose (like EARN, starting with 100%, building up bonds around retirement age, and then going back to 100% stocks after a few years).
Besides a rational comparison of failure rates, psychological stress may be another issue. But how much difference a 60/40% portfolio makes? During a severe crash the all stocks portfolio can drop 50% and the 60/40% portfolio….40%? In either case, it will be very stressful. But will the ‘balanced’ portfolio be noticeable less stressful in such an event?
So, after reading all this, shoot! Am I crazy to keep 100% stocks or is it a sound plan in my case? How much less draw dawn would 10%, 20%... 40% bonds portfolio deliver? Does this make a difference if the failure rate is close to 0%? Are there other aspects I am overlooking?
BTW, of course I will keep a emergency cash fund next to the stocks. I do not count this as part of my portfolio though (will keep it stable to X months of spending. It will not increase, as my portfolio grows). If I need more psychological reassurance, I believe a bigger EF will give me peace of mind (even when this is a 'suboptimal strategy' if you look at it purely from a financial perspective)
I am in my late 40’s and during the accumulation phase, have kept a 100% global stocks portfolio (MSCI ACWI). Recently I have reached the point of FI. So, technically I could retire, but probably I will continue working for at least 2 till 3 years. Maybe even longer (but decreasing my hours as I go). Mainly because I (still) like my job. Secondary, it gives me a bit of extra safety.
I am thinking of keeping my portfolio 100% stocks, even when I retire. I know. Most advice against it. There are all kinds of rule of thumb, like your age in bonds, or somewhere in the range of 60/40 to 75/25. Most of recommendations are geared to US investors. I wonder what makes sense in my situation:
- The 100% global stocks is only my taxable account. My pension/SS is not included in this indication. Also not the money in my house (roughly the mortgage is about 50% of the value).
- If I retire today, my pension and SS will start after 17 to 18 years. This income is life long and sufficient for me. Probably within that timeframe I will receive an inheritance. Also, I can take pension benefits earlier, from 60 onwards if things go south (obviously, it will be lower). But more realistically, I have 10 to max 15 years to bridge (depending when I actually decide to quit, inheritance, etc).
- Healthcare is not an issue in my country. Insurance is about 150 euro a month, regardless if you have a job or not. Actually, when you don’t have a (pension) income, you will get subsidized and will have hardly to pay anything! Maybe 20 a month. If you fall sick, at most you have to pay the first 350 euro a year. Peanuts (compared to the US).
Goal & horizon: to bridge 10 to 15 years until pension kicks in
Risk tolerance: I find this the hard part to answer. If I run my numbers in a FIRE calculator, with 100% stocks it gives me a success change of 97% with my current portfolio value to spending ratio (if I quit right today. Which I am not planning). If I do a 60/40% portfolio, it’s about 99%. This difference is very minor. If I slowly transition into retirement and quit after 2 till 3 years, the success chance with all stocks portfolio is 99%, and with a balanced portfolio 99,6%. So, the difference is even less. Is there still any point of keeping bonds?
The paper The Retirement Glidepath: An International Perspective argues not. According to his data, the failure rate of a World portfolio with 100% stocks has over a 30 year period 6,2% failure rate, and a 60/40% portfolio 16% (Table 3). The constant 100% stocks performs also better than a dynamic allocation some people propose (like EARN, starting with 100%, building up bonds around retirement age, and then going back to 100% stocks after a few years).
Besides a rational comparison of failure rates, psychological stress may be another issue. But how much difference a 60/40% portfolio makes? During a severe crash the all stocks portfolio can drop 50% and the 60/40% portfolio….40%? In either case, it will be very stressful. But will the ‘balanced’ portfolio be noticeable less stressful in such an event?
So, after reading all this, shoot! Am I crazy to keep 100% stocks or is it a sound plan in my case? How much less draw dawn would 10%, 20%... 40% bonds portfolio deliver? Does this make a difference if the failure rate is close to 0%? Are there other aspects I am overlooking?
BTW, of course I will keep a emergency cash fund next to the stocks. I do not count this as part of my portfolio though (will keep it stable to X months of spending. It will not increase, as my portfolio grows). If I need more psychological reassurance, I believe a bigger EF will give me peace of mind (even when this is a 'suboptimal strategy' if you look at it purely from a financial perspective)
Statistics: Posted by mrnice404 — Mon Jul 08, 2024 5:01 am