Bonds anyone? Stocks for the long run

Investment Analysis Clubs Macro Economic Trends and Risks
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{{ Dimensional Fund Advisors offers another lens through which to compare stocks and bonds. Between 1926 and 2022, a dollar invested in the S&P 500 would have grown to $11,527. That same dollar, however, invested in bonds would have turned into just $22 (for short-term bonds) or $131 (for long-term). The comparison isn’t even close. The upshot: While bonds might be relatively more attractive today than they were in the past, the data suggests that bonds will remain relatively less attractive compared to stocks. }}

I have about 2 years’ worth of living expenses in a MMF earning 5.3%, but everything else is in the stock market.

intercst

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Very stock heavy here, too. Generally go with Buffett’s advice: 90% stocks, 10% cash. Not 90% S&P500, more’s the pity.

Needed to reallocate kids 529 and was curious what an age based portfolio would have them in. Senior in high school. 56% bonds, 40% cash, 4% in stocks. That’s a hard no.

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100% stock. Someone in high school has many decades ahead of them. This includes plenty of time to recover from stock market drops and benefit from the much greater growth potential of stocks.

DB2

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Yes.

And when they become at least figuratively financially independent, then put forward the additional crux idea of ALWAYS having very safe (bank deposits or MMF or equivalent) cash for three months or so of normal cash flow to cover emergencies.

At least that was the lesson I absorbed early and have been very very thankful for on three occassions of my life since. Stuff happens, and you do not want to smash the piggybank or force sell investments.

david fb

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I’ve been wondering why for the past 18 months or so our 529 plan has been doing so poorly, losing money as fast as we shovel money into it, for no noticeable increase in balance for too long now. Then I realized it, the fund we are in is 70% bonds… Oops on my part. :frowning:

As per my IRA, all stock. 50% QQQ, 40% VOO, a spattering of other stock stuff.

(I’m 56, daughter is 7th grade, to give idea of my time frames)

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100% stocks here too, along with a small pinch of income producing real estate. Hopefully I have multiple decades in front of me still.

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A 529 shouldn’t be 100% stock…we’re going to need some of that in less than a year. But I do believe a good portion of it should be, especially as in our case we probably over-saved. We might be able to take advantage of this for the kid:

529 to Roth rollover.
(Understanding 529 rollovers to a Roth IRA)

That’s kid 2. Kid 1 is in college, quadruple major, and is also studying for the MCAT. She’s going to need all that 529 and then some. Luckily her grandfather gave her some money when she was a baby. I put it into Berkshire and index ETFs.

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If the 529 money is meant to fund four years of college expenses, I’d start moving 10% per year to fixed income six years before the start of college. I don’t want any money I’ll be spending in the next 5-10 years in the stock market.

intercst

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As interest rates increase, stocks flatten or go down. Money moves to “the sure thing” (ha) which is “interest.” Never mind that you can go negative on bonds just as easily as stocks.

But in a rising interest rate environment, stocks will languish. Depending on your time frame, you can ride it out. Or not.

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Upthread:

Other sources of income? Just curious.

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The message is that higher interest rates make bonds more attractive. The TINA (there is no alternative to stocks) days are over. And bonds may be best for income oriented investors. Over time stocks still have attractive growth potential–but at higher risk.

When buying bonds you would still like to buy when interest rates peak.

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I can try to explain and hopefully @intercst will add commentary if necessary.

If you have a college fund with $200k in it meant to cover tuition+expenses of $50k a year for 4 years, then you ought to start converting the $200k to cash early so that it will be available when necessary AND so that sudden stock market downturns don’t turn your $200k into $100k right when you need it.

But if you are retired with $5M invested, and spend $50k a year, for a ~1% withdrawal ratio, then you can keep only a year or two of living expenses in cash. Because even if there is a sudden stock market downturn, and your $5M becomes $2.5M, when spending $50k, you are still only withdrawing 2% which is effectively just as safe as withdrawing 1% (look up “Safe Withdrawal Rate” for more information about this definition of “safe”). And history has shown that if you just wait it out, eventually you will be back to your original 1% withdrawal rate anyway.

In the case of the college fund, you can’t simply “wait it out” because college starts and ends 4 years later, and because you are withdrawing almost all of it over the 4 years.

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MarkR explained it exactly right.

Once your withdrawal rate gets down to about 3.30%, a 100% stock portfolio has the same historical survivability as 4% from a 60% stock/40% fixed income portfolio. Even 2 years worth of spending in cash is probably overkill, but I’ve tended to be conservative over the past 30 years.

When I retired in 1994 at age 38, I had about 70% stock, 30% fixed income, but planned to do some part-time consulting work, just to keep my resume fresh if I needed to return to the workforce. Over the first 2 years of my retirement, the consulting work averaged out to be about 25% of a full time job.

The late 1990’s was a wonderful time to start retirement. The S&P 500 increased by 200% from 1994 to the market peak in 2000, the NASDAQ by 400%. My retirement portfolio had a couple of big winners in DELL and Pfizer which left me with almost 7 times my initial 1994 portfolio balance when the Dot.com bubble bust in 2000 and the market crashed.

My retirement portfolio doubled within the first two years, and I decided it probably wasn’t necessary to do any more consulting. Then it doubled again in the next year to 4X the initial balance, bringing my withdrawal rate down to about 1%. A 70/30 allocation meant I had 30 years of spending in fixed income which I thought was nuts. So I said, a 60/40 allocation with a 4% withdrawal is 10 years of spending in fixed income, so I’ll hold it there and put the rest in stock. At a 1% withdrawal rate, that left me with a 90% stock 10% fixed income allocation. I was at nearly 95/05 at the market peak in 2000. After taking a 50% haircut in the market crash, I was back to 90/10.

I’ve had confidence over the years in the long-term stock market return data and just maintained my asset allocation through thick and thin. I learned my lesson during the Black Monday market crash in 1987 when the DOW dropped by 22.6% in one day. I stayed out of the stock market for the next 2 years. I’m at least 25% poorer as a result, but education is often expensive.

intercst

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Wow, Intercst! Kudos to you!!!

Just want to make sure I understood that right…

You had already experienced a painful decline in 1987 black Monday episode…and moved out for a couple of years, which made you lose out on the initial uptrend when the market rose again…

And so, you followed a 95/05 portfolio in 1990s with amazing returns…till 2000 happened…You took a 50% haircut in your overall portfolio in 2000, but you still persisted with a 90/10 portfolio!

Is that right. If yes, that is mighty impressive.

The 90/10 ( and 95/05) portfolios…were they just the index funds…or were you actively buying stocks …Regardless, congrats!

Charlie

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Yes, during both the 2000 and 2008 meltdowns I maintained my 90% plus stock allocation and took 50%+ declines in the value my portfolio.

When I was saving for retirement in the 1980’s and early 1990’s, I held a portfolio of about 20 individual stocks. Mutual fund expense ratios were much higher back then – even Vanguard’s S&P 500 index fund had a 0.18% expense ratio. I maintained a long-term buy & hold portfolio and typically only made 1 or 2 trades per year giving me an expense ratio of 2 or 3 basis points (i.e., $200 to $300 per $1 MM invested). Over the years I’ve focused on “minimizing the skim” of financial advisor fees, commissions, trading costs and taxes - with a diversified portfolio, compounded investment returns tend to take care of themselves.

If I was starting out today, I’d go with 100% index funds. You can get an S&P 500 ETF with an expense ratio of just 0.02% today. No reason to own individual stocks.

I currently have about 30% of my portfolio in index funds and Berkshire Hathaway (which I consider to be a big index fund that doesn’t pay a dividend) and the other 70% in individual stocks which I’ve owned for 20 to 40 years with a tiny cost basis after decades of compounded returns. I’d pay a fortune in capital gains taxes if I sold and converted everything to an index fund. Any unspent dividends I have get rolled into BRK.

I summarized my “Retire Early” strategy about 2 years ago on my website.

intercst

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Awesome, thank you! Congrats again!!

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