Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

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am
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Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by am » Sun Oct 29, 2017 12:51 pm

Early 40s recently hit 2 comma club taxable + tax deferred at about 78% stocks 22% bonds. No debt, 20k pension with health insurance expected at 62. 3 kids anywhere from 6-10 yrs from college with about 250k saved (20k/yr contribution). Thoughts have crossed my mind to reduce allocation to 50% stocks/bonds since losses will hurt very much and I could probably achieve my goal of 100-150k income at retirement. I contribute about 100k each year to accounts. I don’t know when I will retire and don’t know my expected expenses. I have been thinking about part time work in the next decade. Was wondering if this is reasonable and what the expected return for a portfolio like this would be?

rebellovw
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by rebellovw » Sun Oct 29, 2017 12:54 pm

I'm not an expert and a newbie - when I hit that I went to 60/40 - from around 25% in bonds.

supalong52
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by supalong52 » Sun Oct 29, 2017 1:07 pm

Isn't a million just an arbitrary number at this point? I mean if you've "won the game" and no longer need to accumulate, then go for the big change in asset allocation. But if you're still on the road, then why make any drastic and sudden changes?

am
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by am » Sun Oct 29, 2017 1:34 pm

supalong52 wrote:
Sun Oct 29, 2017 1:07 pm
Isn't a million just an arbitrary number at this point? I mean if you've "won the game" and no longer need to accumulate, then go for the big change in asset allocation. But if you're still on the road, then why make any drastic and sudden changes?

How about partially winning the game and winding risk down?

SimplicityNow
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by SimplicityNow » Sun Oct 29, 2017 1:38 pm

am wrote:
Sun Oct 29, 2017 12:51 pm
Early 40s recently hit 2 comma club taxable + tax deferred at about 78% stocks 22% bonds. No debt, 20k pension with health insurance expected at 62. 3 kids anywhere from 6-10 yrs from college with about 250k saved (20k/yr contribution). Thoughts have crossed my mind to reduce allocation to 50% stocks/bonds since losses will hurt very much and I could probably achieve my goal of 100-150k income at retirement. I contribute about 100k each year to accounts. I don’t know when I will retire and don’t know my expected expenses. I have been thinking about part time work in the next decade. Was wondering if this is reasonable and what the expected return for a portfolio like this would be?
Assuming an age of 42 then your current asset allocation is on the more aggressive side but still what most here would consider reasonable.
Reducing a 78% stock allocation to a 50% allocation is a drastic change. If you are 20 years from retirement why would losses hurt very much?
Hard to answer your question since you don't know either how long you plan to work or how much you plan to spend!
Also if you plan to reduce your income with part time work, I would expect you would no longer contribute 100k/year to your accounts?

To achieve a withdrawal rate of $100-$150k/year assuming you have a 25 year retirement which in my mind is too short you would need a portfolio of 2.5-3.75 million at 4%. You would need more if you use less then a 4% withdrawal rate which many recommend for planning and even more if you plan for more then 25 years. Of course if you have a pension and/or social security that amount could be less.

Expected returns for a 50/50 portfolio is anyone's guess.

If you use Mr. Bogle's estimate for the next decade he mentioned a return after inflation of about 3% stocks and 0-1 % for bonds. So a 50/50 would return anywhere from 1.5% to 2% yr. Not exactly encouraging.
Of course as Jack likes to state and I paraphrase: let's not discount the real possibility that I am wrong.

J295
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by J295 » Sun Oct 29, 2017 1:41 pm

Sounds like a good time for you to evaluate your IPS and settle into an AA you can live with regardless of market conditions going forward.

For us (retired at 53, now age 58), we were fine having a modest equity allocation (basically age based, so now we are at 52%). We don't mind not having more in equities despite these nice market runs, and are fine with the non-equity portion doing what it is designed to do (our non-equity consists of bonds, TIPS, i-bonds, CDs, AMX savings, floating rate funds).

Your life/family situation is different, but still sounds like a good time for you to settle into an AA that fits you best.

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randomizer
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by randomizer » Sun Oct 29, 2017 2:50 pm

You clearly need to reduce stock exposure in order to sleep well at night, but beware of doing things "drastically". Set a new target AA, like 60:40, and direct new contributions to bonds until you get there. Will take a couple years (less if market heads south). When you get there, re-evaluate.

Personally I am close to two commas and planning to stay 75:25 for the foreseeable future.

Finridge
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by Finridge » Sun Oct 29, 2017 2:58 pm

$1,000,000 sounds like a lot of money, but from the perspective of retirement funds, it is not. Using the 4% rule, you can only withdraw $40,000 per year. Many middle class people will need much more than that to keep their same standard of living during retirement.

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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by rebellovw » Sun Oct 29, 2017 3:02 pm

randomizer wrote:
Sun Oct 29, 2017 2:50 pm
You clearly need to reduce stock exposure in order to sleep well at night, but beware of doing things "drastically". Set a new target AA, like 60:40, and direct new contributions to bonds until you get there. Will take a couple years (less if market heads south). When you get there, re-evaluate.

Personally I am close to two commas and planning to stay 75:25 for the foreseeable future.
Why not just rebalance right away and get to the comfortable AA you want (ex 60/40) and take some of the 'winnings'. Otherwise if the market does drop it could take a long time to get back.

I always think of rebalancing as a way to capture profits vs holding on too long and missing out. Seems like being too greedy holding onto stocks while they are growing so crazy. Use stocks to grow - but collect into bonds and grow again and collect again. A downside is your tax deferred ends up almost being total bonds and you run out of wiggle room.

I do understand though the age issue - at 40 you can take the risk as you have time. I'm at 51 - so I rebalanced for protection.

Thanks.
Last edited by rebellovw on Sun Oct 29, 2017 3:15 pm, edited 1 time in total.

sambb
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by sambb » Sun Oct 29, 2017 3:03 pm

split the difference and move slowly - move to 65/35. Your risk tolerance is changing. Nothing wrong with that at all, and you take some profits off the table. Reevaluate in a few years. Youre doing great, dont overthink this, but nothing wrong with taking some profits down.

Dandy
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by Dandy » Sun Oct 29, 2017 3:08 pm

At age 40 you seem to be in great shape. I agree that reducing equity risk would be prudent. A 50% equity allocation coupled with $100k contributions per year should enable you to still have excellent growth of your investments with less exposure. You also seem to have your children's education funding in good shape. The long bull market has been very good it might be time to bank some of those gains. While age in bonds isn't based on science/research etc. it is a decent starting point. If you vary from that you probably should have a decent reason. Having reached a nice milestone at an early age with equity markets at an historic high - might be good enough reasons.

Percentages can be misleading. Dollars at risk should always be considered. I would do a decent amount of equity reduction soon and consider changing your future allocations and whether to reinvest equity distributions.

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randomizer
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by randomizer » Sun Oct 29, 2017 3:15 pm

rebellovw wrote:
Sun Oct 29, 2017 3:02 pm
randomizer wrote:
Sun Oct 29, 2017 2:50 pm
You clearly need to reduce stock exposure in order to sleep well at night, but beware of doing things "drastically". Set a new target AA, like 60:40, and direct new contributions to bonds until you get there. Will take a couple years (less if market heads south). When you get there, re-evaluate.

Personally I am close to two commas and planning to stay 75:25 for the foreseeable future.
Why not just rebalance right away and get to the comfortable AA you want (ex 60/40) and take some of the 'winnings'. Otherwise if the market does drop it could take a long time to get back.
Generally you want to make changes to your IPS and AA slowly, after careful consideration. Not every time the direction the wind blows changes. Executing these changes slowly over time makes it more likely that you'll do things with the right amount of care.

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randomizer
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by randomizer » Sun Oct 29, 2017 3:19 pm

Fun fact: I've been trying to reduce equities for a couple of years now so I basically only buy bonds. The darn market keeps going up though, meaning that I never quite get there. Guess I'll just keep buying bonds then.

(I exaggerate only a little here, and I'm generally only a percent or two off where I want to be, which is basically a rounding error)

dbr
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by dbr » Sun Oct 29, 2017 3:23 pm

As wealth increases and one ages it makes sense to evaluate what one's asset allocation should be, but it does not follow this should automatically be a drastic shift to bonds. The question is do you need the higher return of stocks, do you have the ability to move on if there is a large downturn in what you are holding, and finally would you bail out psychologically and do something stupid in response to large fluctuations in value. To say something would hurt does not mean anything unless translated into some financially meaningful consequence.

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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by letsgobobby » Sun Oct 29, 2017 3:25 pm

am wrote:
Sun Oct 29, 2017 1:34 pm
supalong52 wrote:
Sun Oct 29, 2017 1:07 pm
Isn't a million just an arbitrary number at this point? I mean if you've "won the game" and no longer need to accumulate, then go for the big change in asset allocation. But if you're still on the road, then why make any drastic and sudden changes?

How about partially winning the game and winding risk down?
drastic moves are probably a bad idea, as I've been counseled here many times. but if your need for risk has decreased meaningdully, and not because of an arbitrary milestone, increasing fixed income could be wise. I've long been 60/40 so never had an appetite for extreme risk. We'll meet our needs easily nonetheless.

am
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by am » Sun Oct 29, 2017 3:28 pm

Dandy wrote:
Sun Oct 29, 2017 3:08 pm
At age 40 you seem to be in great shape. I agree that reducing equity risk would be prudent. A 50% equity allocation coupled with $100k contributions per year should enable you to still have excellent growth of your investments with less exposure. You also seem to have your children's education funding in good shape. The long bull market has been very good it might be time to bank some of those gains. While age in bonds isn't based on science/research etc. it is a decent starting point. If you vary from that you probably should have a decent reason. Having reached a nice milestone at an early age with equity markets at an historic high - might be good enough reasons.

Percentages can be misleading. Dollars at risk should always be considered. I would do a decent amount of equity reduction soon and consider changing your future allocations and whether to reinvest equity distributions.
Some points against reducing equity is that I may have 50+ yrs of living left and equities have a high probability of doing much better than bonds. Additionally, I don’t want to change anything in response to high valuations since that doesn’t seem to work except at the extremes. I have a relatively stable job, no debt, small underfunded pension and social security coming in the future so my bond like investments are already high. Assuming a 50% drop in equities, portfolio would drop to about 600k versus 750k with new 50% allocation which isn’t that big a deal given my current income. I don’t want to miss out on the big positive tail of stock returns (greed).

Points for rebalancing: I have reached a point now where if I work another 12 yrs until 55 and save 100k/yr than I should have over 3 mil assuming nominal returns of 4% for 50-60% stocks and the ride will be smoother and less stressful (but with my current portfolio I could have 4 mil at 7% nominal). With pension and ss, should result in 100-150k in income. I always think, what happens if we hit a protracted down or sideways market-feels like you are throwing money in the toilet even though I know deep inside that I am buying low. This could delay financial independence and retirement.
Last edited by am on Sun Oct 29, 2017 3:31 pm, edited 1 time in total.

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CaliJim
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by CaliJim » Sun Oct 29, 2017 7:41 pm

My $0.02:

Set a glide path to lower risk

Make a 5 or 10% change now to minimize regret

Then glide to 50/50 or so over the next 5 years
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by radiowave » Sun Oct 29, 2017 8:05 pm

CaliJim wrote:
Sun Oct 29, 2017 7:41 pm
My $0.02:

Set a glide path to lower risk

Make a 5 or 10% change now to minimize regret

Then glide to 50/50 or so over the next 5 years
+1 if you are accumulating in an employer tax deferred account, you can adjust your asset allocation with more conservative, read bonds, on your monthly employer/employee contribution. You can set your glidepath as CaliJim notes over time to meet your future needs.
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by Wakefield1 » Sun Oct 29, 2017 8:14 pm

In other words,perhaps not to sell stocks but simply to direct new purchases within the tax deferred accounts towards a "
drastically" higher ratio of bonds rather than stocks? (Even continuing to buy some stocks (funds), just not as much as bonds (funds)?

Dandy
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by Dandy » Mon Oct 30, 2017 2:34 pm

Additionally, I don’t want to change anything in response to high valuations since that doesn’t seem to work except at the extremes.
Have you defined "extreme"? equities being at an historic high might qualify?? There are conflicting sage advice "stay the course" and "buy when there is blood in the streets" (basically buy low sell high). While stay the course is widely accepted on this forum and makes a lot of sense - Mr. Bogle has said when valuations are extreme you should cut your equity allocations drastically (not an exact quote). He did around 2000. I believe he went from something like 80% to 60% - something of that magnitude of adjusting. Now he was a lot older and with a bad heart - but also probably much better off financially than you or me.

I don’t want to miss out on the big positive tail of stock returns (greed

Some people with high equity allocations seem to feel that going from say 80% to 60% means they won't get much growth? 60% will probably generate significant growth over the decades you have left. Especially with your 100k per year contributions. At 40 you do have a lot of human capital left so keeping a high allocation isn't financially "sinful". But do you really need it? or just want it?

Good luck whatever you decide. I'm almost 70 never had higher than 55% equities now at 43% and have been withdrawing $40k -$60k+ per year for almost 10 years and my nest egg has never been higher. I generally stayed the course but did buy some on significant dips.

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HomerJ
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by HomerJ » Mon Oct 30, 2017 2:44 pm

am wrote:
Sun Oct 29, 2017 1:34 pm
How about partially winning the game and winding risk down?
This.

If you're saving $100k a year, you can definitely coast at this point. Sounds like you need $2.5 million to generate $100k a year (plus your pension, plus SS).

Ten more years of savings, and just decent growth (3%-4% a year) on your $1 million and your new savings should easily get you to $2.5 million in your early 50s.

You don't need to take big risks with your money anymore, and a 60/40 or 50/50 portfolio seems just fine to me.

That's what we did in our 40s, and we're still well on track to retire to retire in our mid 50s.

3funder
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by 3funder » Mon Oct 30, 2017 3:52 pm

If I were in your shoes (and I'm not), I wouldn't increase my bond allocation by more than 10%. At your age, you'd potentially be sacrificing significant gains. If you were 52, maybe, but you've got at least a good 20 years of work left in you.
Last edited by 3funder on Mon Oct 30, 2017 3:56 pm, edited 2 times in total.

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ray.james
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by ray.james » Mon Oct 30, 2017 3:54 pm

I think others have chimed in on the same opinion. I would probably move to 60/40 but will not reduce stocks more than that at 42. Consider this, how long will the bond portion sustain you and it will change the perspective on the risk. If that is greater than 10 years then let the stocks ride at 60%.

Unless I am close to life expectancy, this is my view of risk.
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Re: Hit 2 comma milestone in portfolio thinking of increasing bonds drastically

Post by TSR » Mon Oct 30, 2017 5:02 pm

I tend to think that the scale goes something like this:

Age in bonds -- conservative
Age minus ten -- middle of the road
What you've got -- aggressive (and more akin to what most target-date funds do today)

Given your sense that you've more or less "won the game," I'd be real tempted to at least situate myself at middle of the road rather than at aggressive. I'd say do that immediately, then in a year reevaluate. To be honest, I'm basing this in part on the fear of future regret that is engendered by the current state of the market. I'm making no changes, but I'm at more like age minus ten.

Good luck!

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