What to Make of High Stock Allocation Proponents

Discussion of the Stock portion of the Permanent Portfolio

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GH47
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What to Make of High Stock Allocation Proponents

Post by GH47 » Thu Mar 08, 2018 9:45 am

I'm a regular reader of various FI blogs and have noticed that many advocate for a higher allocation to stocks (80-100% in some cases) and specifically no gold. Fine. Each to their own. However, they seem to be suggesting that holding just a few years worth of cash or bonds to "smooth the ride" will see you through. Looking at Tyler's heat map with say 80% stocks and 20% int bonds, the early 70's is a bloodbath, especially from '73. So, how are these folks planning to get through a decade of drawdowns with only a small slice of fixed income and no gold if the SHTF, or am I missing something?
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Re: What to Make of High Stock Allocation Proponents

Post by stuper1 » Thu Mar 08, 2018 10:00 am

Try looking at the period of 1998 - 2008 also. Good luck to them. Those are the people that end up selling their stocks at a loss in downturns because they over-estimated their risk tolerance.
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ochotona
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Re: What to Make of High Stock Allocation Proponents

Post by ochotona » Thu Mar 08, 2018 12:00 pm

Good luck, thank you for selling your stocks to me in 2009
whatchamacallit
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Re: What to Make of High Stock Allocation Proponents

Post by whatchamacallit » Thu Mar 08, 2018 7:29 pm

https://www.fool.com/investing/general/ ... -plan.aspx

I actually think it would work well for a lot people.

If you have enough cash for emotional security blanket. I think my wife would be completely fine like Warren's.
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sophie
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Re: What to Make of High Stock Allocation Proponents

Post by sophie » Thu Mar 08, 2018 8:41 pm

Vanguard keeps trying to convince me that I should be 80% stocks every time I log into my retirement account. I'm in my mid-50s!! That is just outrageous. I wonder if stocks are more lucrative than bonds for brokerages.

Yes, the 80/20 crowd are indeed the ones whose retirement accounts get decimated when the market crashes and they lose their job shortly after. Since they don't have a lot of cash or taxable savings, step 3 is having to dip into retirement accounts to pay the mortgage. Ouch. Check out the Frontline episode "The Retirement Gamble" where there are interviews of people who went through that exact scenario.
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europeanwizard
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Re: What to Make of High Stock Allocation Proponents

Post by europeanwizard » Fri Mar 09, 2018 12:29 am

What's funny is posting such a historic scenario on https://www.reddit.com/r/financialindependence/ or https://www.reddit.com/r/investing/. Your comment will get downvoted although you simply posted a fact.
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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Fri Mar 09, 2018 3:48 pm

It makes sense to overweight equities when you have a long horizon before retirement as long as you don’t panic sell and have adequate emergency funds.

80/20 and an emergency fund to suit your needs should be sufficient. Holistically, assets + EF could really be 70/30. Personally, I consider retirement assets out of reach whether they are invested 100/0, 80/20 or 50/50.
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Re: What to Make of High Stock Allocation Proponents

Post by glennds » Fri Mar 09, 2018 8:58 pm

sophie wrote:Vanguard keeps trying to convince me that I should be 80% stocks every time I log into my retirement account. I'm in my mid-50s!! That is just outrageous. I wonder if stocks are more lucrative than bonds for brokerages.

Yes, the 80/20 crowd are indeed the ones whose retirement accounts get decimated when the market crashes and they lose their job shortly after. Since they don't have a lot of cash or taxable savings, step 3 is having to dip into retirement accounts to pay the mortgage. Ouch. Check out the Frontline episode "The Retirement Gamble" where there are interviews of people who went through that exact scenario.
Would your position change in the instance of an investor whose investable assets were 30x or more in relation to their living expenses? Or a scenario where the investor had another source of cash income or their fixed income met their living needs with reasonably low credit (default) risk?
A related thought - if the HBPP is for the money you can't afford to lose, then theoretically everything else you can afford to lose. What if the dividing line puts your HBPP at 30% of the aggregate total. If your horizon is reasonably long, let's say 20 years, why not leave the other 70% in equities, if you can tolerate watching it ride up, down, and back up from time to time?

Sophie, I'm not disagreeing with anything you're saying, for most scenarios. But I am saying there may be some scenarios where being heavily weighted in equities could be sensible. It's not just math, the investor's mentality is a big factor.
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sophie
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Re: What to Make of High Stock Allocation Proponents

Post by sophie » Sun Mar 11, 2018 9:30 am

Wow, I sure got a lot of blowback from that post...

There have been multiple periods of up to 15 years where stocks lose money. Yes, over very long periods of time you can't beat stocks for total return. The problem is that you don't know when the next 15 year "valley of death" will start. And you can't guarantee your won't need your savings for that requisite 15 years: job loss, pay cuts, divorce, medical illness...let me count the ways that you can end up in an unexpected financial bind. When the portfolio drops 40% in a year like 2008-2009, you can't just wait until 3 years later to eat or pay the mortgage.

Glenn: I proposed something similar to what you were saying a while back. Instead of the bond allocation, use the PP as the backstop - but make it big enough to let you ride out a 15 year downturn, not a paltry 20%. At least 20x expenses, say. Then you can put the rest into 100% stocks and be a lot more confident that you don't need to touch them no matter what. I expect this is sort of the thinking behind the golden butterfly, which is a PP with a 100% stock portfolio on the side. Instead of fixing this at 20%, you could regard it as an allocation that varies depending on total savings.

Of course, if instead of a 10 year old bull market we were coming off the 1998-2008 period or the 1970s and everyone's stocks were losing money in real terms, we wouldn't be having this conversation. You'd all be shouting from the housetops about how only fools would be holding money in stocks. How things have changed!
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buddtholomew
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Re: What to Make of High Stock Allocation Proponents

Post by buddtholomew » Sun Mar 11, 2018 10:18 am

You also run the risk of fixating on a period when stocks did poorly and setting up too conservative an allocation.

I like the PP for its conservative growth, but I think it is too conservative for those still accumulating.

Give up far too many gains when stocks are doing well.
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jhogue
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Re: What to Make of High Stock Allocation Proponents

Post by jhogue » Mon Mar 12, 2018 3:48 pm

Budd,

That is baloney.

Anyone who invests in the HBPP ought to understand that it is bound to under-perform in an equity bull market.

That is how you get "conservative growth."
“Groucho Marx wrote:
A stock trader asked him, "Groucho, where do you put all your money?" Groucho was said to have replied, "In Treasury bonds", and the trader said, "You can't make much money on those." Groucho said, "You can if you have enough of them!"
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Xan
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Re: What to Make of High Stock Allocation Proponents

Post by Xan » Mon Mar 12, 2018 4:29 pm

jhogue wrote:Budd,

That is baloney.

Anyone who invests in the HBPP ought to understand that it is bound to under-perform in an equity bull market.

That is how you get "conservative growth."
More generally, it will always be underperforming the best-performing asset, and outperforming the worst-performing asset. If you're a pessimist, you'll always be complaining about underperformance, because it'll always be true.
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