What is your asset allocation? Whether you agree with either of us or have your own approach, we'd love to hear from you in the comments! Be sure to specify whether you're pre- or post-FIRE.
Static buy and hold portfolios will not handle volatility over long periods of retirement. Monte Carlo back testing doesn’t work, it will fail just when you need it the most.
@@paulturner4419 You've stated an opinion on one approach but not your own recommendation nor the basis for your position. Care to share your further thoughts with our audience?
As a 55 year old who doesn't want to retire, but wants the option should I choose to do so, I VERY much appreciate your series and this conversational format. Keep up the great work!
I can relate to this conversation. I’m post-FIRE and didn’t move to Bonds until 3 years till retirement. I also had an epiphany that it was crazy for me to be 100% in equities. I’m ~70/30 allocation in Equities/Fixed Income and a very small amount in Crypto. I sleep well at night and feel prepared for a crash in the market.
Loving these videos - greatly appreciate the effort and time you guys put into them. Please Keep it up! Looking to RE soon myself and don't really have any friends or family that "get it" that I can bounce constructive discussion off of. Glad you guys have each other to do so, and allow us to sit in on your conversations.
This discussion leads me back to target date funds. Maybe a slighter higher ER, but you only have to decide what percent bonds you want and which fund date gets you there, They eliminate the second guessing and rebalancing and decision overload.
Definitely a popular option for good reason! On a FIRE path, it is worthwhile to consider carefully what the target date is as some may find the % bonds a bit conservative in the years leading up to FI.
Great discussion guys. This is the exact thing I've started to think about with my portfolio. At 44, and 5 to 10 yrs from the date, I'm still firmly 100% equities. But as we work to better identify when that date will be, this is something I have been thinking about more and more. Despite timing the market being a fool's game, buying into bonds right now sure seems like a bad idea.
I’m about a 10 years behind you both and this channel has been very informative in helping me see what hurtles I’ll be considering at that point. Thanks for sharing!
Excellent episode and I agree with the very last thing you put up on the screen “to be continued” is greatly needed! I am 51 and my husband is 54 we are looking to fire in the next 1 to 4 years. Thank you for all the effort you put into these videos I look forward to the next one every single time :-)
great topic! We are at 75% domestic stocks, 20% foreign stocks, and 5% bonds. We have hit FI, but are a few years off from retiring as we wait for my wife to get her early government retirement / pension. That pension drastically reduces our need for fixed income sources from our investment portfolio. Keep up the good work guys. I am very happy where my finances are, but agree that it is likely time to talk to a financial planner. Maybe you could do an episode on how Jason picked one / what Eric should look for if he decides to choose one?
Thanks for the suggestion, Andrew! We've got an episode coming up that may interest you a lot. Stay tuned - it will be in Jan or Feb. And congrats on achieving FI!
Great discussion on this topic! I am in the 4 year away from FIRE and agree with you guys on the topic of asset location. The interesting point is using financial adviser. My challenge is working with non fiduciaries and have seen the investment recommendations being driving by their profits vs my direction.
Thank you for making this video, very informative and helpful. I'm on the same boat as Eric and for years now also didn't see the benefit of having bonds as part of my portfolio but your discussions made me think that I should probably re-assess my asset allocation.
I’m pre-FIRE and in the same boat as Eric…I can’t in my right mind justify taking money out of equities to put into other asset categories. I’m really interested to see where the rest of this conversation leads - it’s always good to hear the counter argument. Really enjoy the channel - the format is great and you’ve explored many things I’m interested to learn more about. Kudos to you both!
Hey Guys - I have really enjoyed your channel so far and finding it inspiring and thought provoking in our own retirement planning. Wondering if you guys could do an episode on which tools you used to validate your individual numbers that you worked toward (other than spreadsheets). Thanks again and looking forward to watching your journeys.
great talk and topic. Im going RE at the end of the month (53). Like Eric, I've been beating my head against a wall trying to make a decision on the fixed income portion of my taxable account. I too was going down the Total Bond Market Index route but am now seeing it can be more nuanced with Muni's, TIPs etc. I think what I'll end up doing is just a blend of a few different types bond funds. To your question, my current planned asset allocation (across both taxable and pretax accounts) is 85% stock index funds, 10% Bond, 5% Alternatives (largely REITs). This is a planned allocation as I need to adjust the taxable account allocation (Retirement accounts already reallocated). Im taking an approach of shifting my Dec Dividends and cap gains (which will be taxed anyway) and shifting them to Bond funds to increase the allocation. Depending on 2022 projected tax bracket, I may do some bulk re-allocation as well. Oh one other note, Ive put about 25% of my cash position into USDC stable coin earning 9% interest. Not for the mainstream investor but Im ok with the risk.
Congrats on your impending RE, Wade! Sounds like a solid plan. We've thought about stable coins too but haven't taken any positions yet. What helped you become convinced this was the right option for you?
Good conversation! I am having the same hesitation with rebalancing my IRA - should really increase my bond allocation by 5% to get to the 75/25 stock/bond set. But I am just finding it hard to justify pulling the trigger. I FIREd this year and have 4 year cash position which makes me feel more comfortable having higher stock allocation in my IRA. Especially since I can’t access the IRA for another 7 years. My Roth is 100% stock. We will see what the new year brings 😁
Thank you as always for your content. Great fun to listen as you hash this out. We’re work optional. Equities (1/3) and income property (2/3). Low cost index fund for equities. Same age as you all. Not likely to stop working entirely but will pivot away from travel-heavy executive roles. I’ve watched and advised a half dozen older family members in their retirements. In all cases their steady-state spending trended down voluntarily and quickly while their investments gained value. You each have safety nets more powerful than bonds, which are made of experience, talent, and drive. My guess is that your incomes - even from modest pouring jobs - will eliminate the need for fancy asset allocations. You both are likely to live as many more years as you’ve already lived. Equities will continue to roll along making you wealthy and asset allocation complexity irrelevant. Enjoy the time freedom. No need to worry. Kind regards.
Jonathan, thanks so much for your support and and feedback. We really appreciate your kind words and your confidence in our paths forward! Congratulations on your own achievements and best wishes to you on all that's to come.
Thank you for this series. I will need to watch it again!!! I feel confident in the aquistion phase. Drawdown........NOT so much. PreFIRE going to start Coast FIRE in January. I have a pension and just need to hold and work part time a few more years.
Thanks again for sharing guys! Since you asked...We have been FIRE'd for 8 and 4 yrs respectively. Our asset allocation is about 80/20 stocks/bonds, but like Jason and his spouse we have a broader mix of assets with the addition of several REIT funds (in lieu of owing rental RE directly) and a sizable position in a local Utility stock as well as a variety of bond funds. Our largest single position is S&P500. We own no commodities or crypto (unless a fund is holding it unknowingly by us). All funds have been self directed. Since 2013 our average asset annual increase has been about 10.7%.
@@TwoSidesOfFI Draw down strategy? We planned using the 4% rule and listed our non-discretionary and discretionary budget items. Due to a good extended market increase we FIRE'd at about 3.5% the first year. The market, and our NW, continued upward, so today our draw is about 1.5%. It also helps we started a modest pension at the earliest full value date which covers about 4/5 of the non-disc. budget. You guys should do fine as you are more thoughtful in planning than most.
I’ve gone around and around on this, as well. In the end, I went with the Buffet VOO/VGSH portfolio. It solves a lot of over thinking and allows you to move between US stocks and a safe holding. I like VOO a little better than VTI, and BND had mortgages and corporate bonds, which I didn’t want. good luck to all of us !
@@TwoSidesOfFI I'm still 8-10 years away, but I don't see me going 90/10 unless the market is way down and I'm buying a lot of VOO. Under normal circumstances, I think I'll be around 75/25 or so - but still using VOO/VGSH as the 2 funds. I've looked at doing the VTI/VEA/VWO/IEF/TLT/GLD/DBC thing (something like a Dalio portfolio), but I know myself and I'm going to want to sell everything if the market is way down and just buy more VTI. If I start from that behavior and work backwards, I might as well start with just VOO and keep some cash (VGSH) for spots to buy more. VOO is US-based companies, not just the US market, so it works. You still get international exposure, but with US accounting.
So much food for thought and another excellent episode. I’m working hard towards FIRE but I see crypto as being the main vehicle for achieving this in a relatively short space of time, particularly with DEFI offering excellent returns of 20%+.
Long time quiet sub here. The thinking behind being 100% stocks is that EVEN IF you have to sell in a bear market you are still up vs the scenario of holding a % in cash. Because you are missing out on that cash growing over time and you are assuming that potential gain is lower than the loss you would experience by selling in a bear market. I think a comparison of the scenarios of: 1) 100% equities no cash 2) % equities & % cash would be cool as the base of this convo. If 1) gives a net +ve gain, which I think it does, then why would you hold cash. I think holding cash seems safer, but in fact isn’t. Would love to be proven wrong on this. I’ll try and run the numbers later. Also kinda crazy that the no1 appreciating asset class wasn’t mentioned here.
Hey guys, here are a few pages from a book I found on the subject. In conculsion, it says the pre-FI asset allocation is not that important. Post-FI it becomes a bit more important. But even then, the biggest factor on your portfolio's success is still sequence of returns risk, asset allocation doesn't really protect you that well from it. Happy to share the link to the analysis, seems like youtube removed my last comment.
@@Michael-schroder We agree that the importance post-RE (i.e. when you start withdrawing) is very important. However, it's hard to deny that it's not important to think about from a growth perspective along the journey. We do agree that there's no need to start with any complexity whatsoever - i.e. invest in total market or US total market, whatever. No need to get fancy. But it's also true that leading up to your RE date you need insurance against SRR so that you have other options for selling - that just makes sense mathematically. That said, we are definitely interested in the link. Try to post it again and in the meantime we'll have a look at the moderated comments to ensure RU-vid didn't flag it. Thanks for sharing!
I'm mostly in dividend stocks (listed, also non-listed and co-ops, which are a bit more tax-efficient) and a few funds, also owning a small patch of forest for very irregular income (Finland is a forest country). To adjust your allocation, I would suggest making new investments in dividend/fixed-income options and switch a certain portion of your growth-stocks to those each year regardless of having to pay some capital gain tax. Edit: I'm having a plan of reducing my work hours drastically in a few years at 55. Work-related pension can start at 65y7months at the earliest. My current dividend etc. income approaches the estimated pension and is about twice my spending floor. (So, my income will almost double after 65.)
I have a couple of reactions to your discussion regarding allocation, bonds, index funds, and so on: 1 - Bonds have value due to their uncorrelated nature to the stock market. They offer superior risk-adjusted returns when combined with stocks. Counter-intuitively the most risky bonds (long duration) offer the most benefit when mixed with stocks. There is a limit to how much is a benefit vs going overboard. 20% is close to that number. Bonds offer strange sort of magical effects when blended into a portfolio. 2 - Buying things like TIPS or I-bonds and holding them until their maturity grants you some interesting opportunities to treat your cash-like reserves. Look at TIPSwatch for more info. Do not buy mutual funds with TIPS. These are not like buying them individually, which is ideal. 3 - Bond mutual funds are tricky. They are essentially perpetually maturing, so they are a good way to keep the duration and yield consistent. You are best off buying an index fund of long term bonds for their special sauce. Short term stuff should be more like cash, tips, ibonds, etc. 4 - You should be adding gold to this mix. Similar to a long bond or a TIPS bond, gold is sensitive to interest rates and breakeven inflation rates. It's also uncorrelated to just about everything else. This reduces your overall risk, even with a low-returning high volatility asset. It's really strange, but it's just math. Buy physical and hold yourself. Then use an etf to rebalance with. 5 - Rebalancing this mix of low-returning assets and high volatility, is where the magic happens. Go to portfolio visualizer and plug all these in with your stocks, and you'll see it happen before your eyes. You will have less money at the end of the day if that day comes when the stock market is peaking. The rest of the time you are likely to beat the SP500 with a lower risk blend of assets like bonds, gold, and reits. It's the rebalancing and uncorrelated nature of the assets that offers this benefit. 6 - I challenge you to look at a backtest from the late 1990's through today, and you'r eyes will open. Many low risk portfolios like 20% long bonds, 20% gold, and the rest stocks, beat out the total stock market until 2017, or even 2020 in some cases during the covid crash.
At about 4 years pre-FI, we're 80/20 stocks:bonds. Personally less interested in the retire early part of FIRE, so feel more comfortable with a higher stock allocation. Stock breakdown is roughly 3 US:1 International equities. Bond component is where we deviate most from your discussion. Trying to hit a 50/50 split between short and long term bonds, we have put 10% in a short-term bond index, 5% I bonds, and 5% accelerated mortgage prepayment. By only holding short term bonds as an index, we're defending against potential near-term interest rate hikes. The reasoning for the accelerated mortgage prepayment is that it's equivalent to a long-term bond purchase that eliminates a future expense (such that it achieves the goal for bonds to cover spending during market downturns) and that would have to be paid with post-tax dollars anyway (so a higher effective yield than the mortgage interest rate itself). You dismissed I-bonds in the video, but I'd like to make the case for them being a modest component of the bond allocation: by tracking inflation, the I-bonds hedge against inflation outpacing bond yields, and effectively allow you to pre-pay future expenses today by inflation adjusting your dollars for any date in the future that they'll be spent; since I-bonds are not market-traded, they're also not subject to principal loss risks including when FED increases interest rates. Since it seems we agree that the goal of the bond portion of the asset allocation is to tide through equity downturns for the intermediate term (5-7 years), I'd argue that I-bonds and mortgage prepayment offer great ways to cover portions of your spending during those downturns that are diversified relative to the risks of market-traded bonds.
Thanks for sharing your thoughts, Dan! We've both considered I-bonds but haven't yet convinced ourselves of the value in our portfolio. Your points are well taken.
@@TwoSidesOfFI Since you’re relatively limited in purchase amount each year- 10k per person (20k for married couple), plus 5k per person if you want to hassle with the tax payment conversion side…… converting 20k per year for future inflation hedge seems quite reasonable with zero risk compared to bonds. Maybe I’m missing something, but seems reasonable to me. Thanks for sharing this discussion. You’ll figure out what’s right for you. Remember, once you’ve won the game, there’s no upside to keep playing. 🤓
One key aspect of Paula Pant's portfolio isn't accounted for in her M1 Pie. That is strictly her equity allocations. With how much rental income she has, there is a significant portion of yields from assets giving a psuedo fixed income result that she can afford to have her M1 Pie be all-in on equities and still weather the downs.
It's good to see you talking about bonds. They are important for retirement. IMO, any risk should be taken in equities vs higher-yield bonds, since equities typically deliver a better risk-adjusted return. I wanted to note that the three-fund portfolio does contain some alternatives. 3% of VTSAX & VTIAX are REITs.
I think re bonds it sounds like you’re suffering from analysis paralysis - the purpose of the bond position is downside protection should equities have a really bad year or two - so it doesn’t really matter which bonds in my mind as differences in returns there will be small compared to what your equity positions are doing year in and year out… Like, if the real return of your bonds is -2%, cash -5%, and equities -30% in any given year, you’ve covered your living expenses holding cash or bonds without having to liquidate stock that’s way down and the small difference between different bond types and cash doesn’t really matter very much.
I'm 30 years old and planning to retire in the next 5-6 years (lean-FIRE + geo-arbitrage during the first few years to smooth out sequence of returns risk) I just work in a big box retail store so maybe I'm missing something here, but I'm so confused on why you need fixed income for 8.5 years. You apparently have plenty of $$ stashed away in your tax deferred accounts that you can start doing Roth conversions on to build a Roth conversion ladder. Also you mentioned investing in a 457b which could be used as another source of income during those first years since you can withdraw from that account without early withdrawal or penalties. Taxes also shouldn't be a concern if you plan ahead. Start doing those conversions during your earning years. If done right, you can actually make $159,700/year (married filing jointly) and pay $0 in taxes. You can also use tax gain harvesting to bump up your cost basis by selling shares and repurchasing them (no short sale laws against it) every year to help you claim losses later on in bad years. $159,700/year during your earning years comes from: $25,900 standard deduction (married) $20,500 (x2) 401k contributions $6,000 (x2) Traditional IRA contributions $80,800 long term capital gains As for asset allocation it's definitely a good thing you switched to something more conservative. I'm a total weirdo with my allocation and people think I'm crazy, but we'll see what happens. I came up with my portfolio by back testing many allocations while trying to find something that historically would have generated a high permanent withdrawal rate, had a low-ish start date sensitivity and didn't have huge drawdowns and had a relatively quick rebound intensity. I didn't want to do any individual stock picking, only index funds. I ended up with this: 10% US Stock 30% US Small Cap Value 5% Emerging Markets 10% REIT 25% Long-term Treasury 20% Gold Historically it would have generated about an 8% average return. The longest drawdown would have been about 3 years and the portfolio's deepest drawdown was only 13%. Start date sensitivity is 7.1% and historically it would have successfully supported a (perpetual) withdrawal rate of 6.3%, which would have been ridiculously aggressive and not recommended.
Thanks, Andrew. There's plenty of merit in your comment, thanks for sharing. Just remember that personal finance is just that - personal. Roth conversions are a reasonable strategy for many, but not all. We each have different % of assets in taxable vs. tax deferred accounts as well, which plays into that decision making. And carrying sufficient accessible (irrespective of asset location) fixed income is about ensuring the right risk adjusted return, nothing more. The # of years of expenses one carries is also influenced by one's risk tolerance and risk capacity. We each need to make decisions as best we can. Just remember that backtesting is only that - looking back at previous conditions. None of us have the ability to project forward. Being sufficiently diverse, minimizing fees, maximizing savings rate, and being thoughtful about withdrawal rate provides the best odds we know. Best wishes to you on your journey.
I am curious why you guys dont go down the dividend stock route? You dont draw down your principle, if you pick high-quality stocks, your dividend payments go up over time. Also, dividend growers tend to grow over time in terms of share price, say you needed your principle down the line. I am very much planning to retire early, but really dont see the benefit of the classic 4% rule as your principle goes down. Whereas dividends are paid to you and good companies grow their dividend a lot faster than inflation. Also, in a market downturn, when your principle goes down, your dividend payments keep coming in. Would be curious for your take on this. Cheers
Yeah, bonds/bond funds are discouraging right now. The only ones that (sort of) make sense to me are TIPS, that have the 2 parts, the fixed-rate (which is about 0% right now) and the inflation tracking half, which make them look better than most regular bond funds. Until/unless interest rates go down. Also, iBonds, from TreasuryDirect, but those are only sold thru that and there is a limit of $15k/year, so not for an IRA really. almost 3 yrs ago I went with 3 yr MYGA's (multi-year-guaranteed annuities) that paid 2.60% but they aren't really liquid and when they are up this spring I will be within a year of age 59.5 so I don't think I'll do those again. I'm roughly 70/30 equities/bonds(annuities) right now. Yeah, bonds are tough.
Have you looked at the Wellesley and wellington funds? They are active funds but vanguard so the cost is pretty low and they are setup as 60/40 or 40/60 funds focused on more reliable value income equities. They work pretty good as glide path options to reduce risk as you get closer to retirement date.
Yep, both Fritz and Big ERN are fans of doing some options trading for fun and profit. It's on my list to look into but admittedly it's still sitting on my to do list. -Jason
If you are worried about how to get the allocation to be more fixed income, just switch your weekly "buys" to be something like VBTLX, low cost vanguard total bond index fund. That will bring your allocation down over the next 3 years and will leave your stocks intact.
Great video. My suggestion to Eric is to go with Jason’s portfolio but make the US allocation 60% and alternatives 20%, and nothing to bonds (or 65% to US stocks and leave alternatives at 15%). Eric has done extraordinarily well with a high risk portfolio and now is a great time to ratchet back the US allocation. The harder decision is the geography of that allocation - taxable vs tax deferred accounts. Probably makes most sense to rebalance in the tax deferred accounts so there is no current impact. Good luck!
Hey there, great video and super visualization of your portfolio allocation, I would have two questions about your allocation and the decision making about the following: The reason to put more than 50% of your stock in to US based stocks, wouldn't be a worldwide view be better to decrease risk? Very low allocation in "crypto". In case bitcoin would succeed as a world reserve currency, wouldn't be a 2-5% allocation be better to shield yourself against inflation risk? Thank you so much and keep up the great content!
Thanks so much for the feedback. There are a lot of schools of thought on international allocations. Some people invest purely in the US market, while others invest solely in a total market fund. Yet others purchase separate allocations of US vs. international, and you'll find varying % of the latter. All of this comes down to individual preference and your feelings about the longterm prospects of the US stock market vs. other geographies. Some are aligned with you regarding the role of crypto in portfolios. But it's still early days and it's difficult if not impossible to determine how things will go. So many choose different vehicles as hedges against inflation risk. We will see what is borne out by our experiences in the coming years!
Hm very interesting approach, true in the end it depends on everyone's personal preference and risk tolerance. Very good to see that there are other path to financial freedom other than getting rich with cryptocurrency, even though it is a truly innovative technology and most likely will change the future overall. But even the most conservative Warren Buffets of this world would be invested in it one way or the other if it happens to lead on; let say the sub branches of a given company probably experiments in that area: that small branch might develop into a new form of company. (Like Amazon with AWS)
29, been working for 2 yrs in banking in Italy, wife is on her way to become a dermatologist and hopefully in 3-4yrs she will open a private practice. Right now we're saving and investing €30k out of the ~50k of after tax yearly income. We have 100% World Equity at the moment in our ptf. Question is: does it make sense to save so much in % of our net income now that we're still in our 20s, when we expect to earn €100k or €150k combined in 5 to 10yrs from now? Thanks for the inputs
Yes it does. Saving as much as you can, as early as you can, is the surest path to building wealth. This is because you get a longer timeframe for the magic of compounding interest+gains to work for you. This is why they say every dollar (or Euro) saved at 20 years old is worth 88 by the time you're 65. Naturally, increasing your savings rate as you start to earn is even better! But saving big early on - not at the expense of living of course - is worth it.
Although I agree with a lot of what J L Collins has in his book, I don't agree with putting all your equity in USA stock market. A blend of international, emerging and domestic equity exposure is a better way to go as each country stock market has periods of over and under performance relative to each other. Look at Canada vs USA stock markets in the 2000 to 2010 period and the 2010 to 2020 period. The US market has bee outperforming the rest of the world for a decade or so so history indicates that another market will outperform for the next decade.
Fire in 1 or 2 years but not touch pension for 5 years. Mix then will be 15% cash and 85% equities in a global fund including 🇺🇸. I think both binds and sticks could suffer as interest rates rise, particularly bonds
This is my blind spot, I'm 100% equity almost lol still in accumulation phase but the insight is important. One question is: if my withdraw rate is only 2% let's say, does that mean I can keep it 100% equity and somewhat fixed withdraw rate during downturn?
The answer is "maybe", but it's certainly higher risk. One key element is how long your drawdown period will be i.e. how long is your expected lifetime once you start withdrawing. You can model this using cFIREsim or similar tools. It also matters whether you will have other income sources (like Social Security in the US) later in your retirement, which could reduce your drawdown from your portfolio.
Having a few years of cash is a great idea. Admittedly we are hesitant to sector invest given the volatility of any given portion of the market, hence our broad-based holdings. Best wishes to you.
No offense guys, you are doing great work, but not even including bitcoin in your alternatives or as a part of your portfolio is a disservice to you and your audience. I’m not talking about the 10,000 other shady cryptocurrencies. I know bitcoin is volatile but zero is the wrong allocation.
Hi Shane, no offense taken. That said, we both hold small positions in crypto as shown in the pie charts and in the show notes. But it's not presently BTC. Thanks for watching and for your feedback!
Indeed but we suspect that it is the whole point of them! They'll never thrill you, but they'll be there when you need to sell something and stock are way down.
Eric, we are at the top of a 10 year massive bull market. Just take your portfolio and apply the 2007 to March 2009 market performance to it and see how you feel about your 100% equity allocation. Stress test it and see your risk tolerance.
