I get the concern for a large drop in the market and it is the main reason why I continue to work and invest even though I could just walk away and live a very nice life.
You should look at the resiliency of your current portfolio and see how it weathered the 2022 downturn. Between 12/31/2021 and 12/31/2022 my pre-tax and post-tax accounts lost between 29.2% to 44.6%. By 12/21/2023 the accounts had fully recovered and were up 14.9% although that does include two years of additional contributions buying through the dip and rise.
How did your portfolio handle this period?
>I'm just doomsaying and speculating by looking at some historical huge losses like black monday or the great depression
If you were long throughout 1987 and held through Black Monday, you ended the year down only 2.4%. Those who held recovered fully the following year with a healthy 7.3% return. The pain was borne by two groups: (1) the panic sellers and (2) those in the derivatives markets who were upside down when they got margin calls. It's funny, my father was a broker and options trader at EF Hutton back in 1987; I was a child then and will never forget the look on his face when he came home that day: He looked exhausted and defeated. Yet the world did not end.
The Great Depression was a very different situation: 1929 might have been another 1987, but the leaders of the great nations at the time attempted radical and often contradictory moves to "fix" things. This only created an environment of uncertainty that exacerbated and prolonged the situation. One can think of that approach as the opposite of Bogleheaded, since it was exactly contrary to Jack Bogle’s advice that in the midst of market upheaval, "don't just do something, stand there." Amity Shlaes' book, *The Forgotten Man,* is a great book on that topic if you enjoy reading about such history. The 1970s stagflation and the 2000s lost decade are the closest we've come to that and, thankfully, they weren't close. Nothing since has come close to 1929-1945 and we all should hope that remains true.
>I could retire early, but I would need to keep money invested to continue to live off it for years to come. What do people do when they reach this point? Would switching x% to bonds really protect my funds?
You didn't say how much you already have in bonds and you seem to be doubtful about them. Let's reframe the question this way: If the prospect of volatility in your current asset allocation gives you anxiety, then is there a solution, preferable over bonds, to reduce that volatility?
* Equities? Not helpful to reduce volatility.
* Real estate? REITs are too correlated with equities to help. Directly owned real estate holds its value but is very illiquid and requires either "sweat equity" or the cost of a management company to maintain.
* Cash? Cash helps with volatility, but the yield on cash rarely outpaces inflation except over very short periods.
* Commodities, currencies, crypto, and derivatives? They offer zero internal rate of return: They're just price speculation that more resembles a weekend in Las Vegas than a genuine investment.
That leaves bonds. Adding nominal bonds with BND or VGIT and inflation-indexed bonds with VTIP is a reasonable approach. If you're 100% equities right now, consider 80% equities and 10% BND 10% VTIP as food for thought. Adjust those allocations until you can sleep well at night.
That all said, Morgan Housel, author of the wonderful book, *The Psychology of Money*, notably admits that he maintains a 20% cash position. He acknowledges that large a cash position doesn't make mathematical sense, but it gives him comfort and helps him avoid making behavioral errors with the rest of his portfolio. So, for him, that allocation makes a lot of sense. Perhaps something similar merits your consideration.
Housel's *The Psychology of Money* and Rick Ferri's *All About Asset Allocation* are two resources I'd recommend to you.
We do tend to push “VOO and chill” pretty hard here, but if the possibility of a 20% loss in a day (like 1987) or a 50% loss over the course of a year (like 2008-2009) would make you lose sleep, by all means reduce your risk.
> Would switching x% to bonds really protect my funds?
No guarantees, but historically investment-grade bonds have been less volatile than stocks and only [mildly correlated](https://www.guggenheiminvestments.com/advisor-resources/interactive-tools/asset-class-correlation-map) with the S&P. That being the case, we would expect them to [cushion](https://www.visualcapitalist.com/90-years-stock-and-bond-portfolio-performance/) some of the highs and lows.
It’s not a loss until you sell.
Bonds won’t protect you.
Just diversity your assets and don’t freak out when there’s a big market decline. There’s always one on the horizon. Might want to consider adding some JEPI to add some more stability to the portfolio.
If you can’t handle big ups and downs, move some of your money out of the market and into a HYSA. At least they are paying 5% right now.
Yes, this is exactly why people increase their bond allocation as they approach retirement, because stability becomes more important relative to growth.
Also, the standard 4% withdrawal rate is designed to protect against the worst case scenario of a crash. If you're retiring for 20+ years, you have time to survive a crash and then see your position recover.
It's hard to give you more specific advice without numbers, though.
i think if your 20 years of gains can be erased in 1 day, your net worth is least of your concerns. There will be bigger issues to worry about.
Beyond what you say, I would say have some real assets like paid off home. Then have enough money in HYSA for few years. Also you can switch your retirement portfolio to target date funds so that its adjusted automatically.
I’m in a similar position. My advisor and I have discussed putting assets into three “buckets.”
The first contains enough assets for 5 years of living expenses and is parked in an HYSA.
The second is for the next 5 years and is conservatively invested.
The third includes the remainder and is focused on total return.
The idea here is that even if the market drops, your bucket #2 + #3 will have time to recover. And you can still grow your assets without fear of not having enough to survive.
More than 95% Warren Buffets assets were acquired after the age of 60.
The buckets are not equal. Example: $1M in assets, $50k/year in expenses.
* Bucket 1: $250k in cash money.
* Bucket 2: $250k in bond ladders.
* Bucket 3: $500k in stocks.
Personally I think 10 years of expenses in buckets 1/2 is probably too conservative. I'll be aiming more like 3 years in each.
I know its the extreme, but if we had an instance like the great depression, you'd have another 10 years where you'd have to pull from the market before it fully recovers.
The more likely alternative is holding everything in cash under your mattress and watching it devalue over time.
Physicians have a great saying: When you hear hooves think horses, not zebras. I think the same sentiment is true here.
if the entire stock market goes to 0.......the bonds are gonna be worthless......and time you come out of the nuclear fall out shelter to fight the cannibals.....
Be more specific. Retiring early isn't much different than retiring in your 60s as you still only have a moderate chance of death bailing you out of bad stock returns. You still have to plan for 30+ years. While 60 years requires some more money it doesn't require that much more.
That being said diversify more.
If you have 30x next year's retirement spending you are in very good shape. At 40x you are safe from just about everything. Below that very bad luck is a problem. If you are there, you can start derisking some.
An example of derisking (assuming tax advantaged)
* 15% USA small cap value
* 15% EM value
* 70% intermediate bonds
That portfolio returns about 1% less than stocks while being a much smoother ride. lots of negative correlations between the factors in the components. If taxable money you can do the same sort of thing with permanent life insurance or if you are close enough to 60 deferred annuities.
Asset allocation is important. If you're staying long individual stocks consider trailing stop orders in case the market dives. Your market order goes live at that point and while price isn't guaranteed you can minimize loss. Alternatively use limit orders.
Personally, I think bonds are an important piece to diversify a person's portfolio regardless of their age, years left to retirement, and market outlook.
I would just divide my investments, move some into safer dividend index funds, bonds, HYSA, and and maybe even take some profits I mean hey the market is boiling hot right now. For perspective I’m in my mid 20s and what I would do in your situation but personally I’m obviously well risk averted as time is on my side..well should be
I have to ask:
1. What does your portfolio consist of? All equities?
2. What is your cost basis vs gains?
You talk about losing what you’ve worked 20 years for but I’m guessing a significant amount is your assets is market performance, not solely contributions. Not justifying accepting a 20% loss on your current value but trying to put it into perspective. You need to have a long-term investment strategy that at least risk-adjusted market returns.
It’s common tactic to transition to conservative portfolio allocation when you near retirement age but you have to try to figure out when you expect to be drawing down your retirement pot.
I don’t understand how it could all be erased in a day. Black Monday was a 30% drop, not 100%.
As opposed to 'erased', just set back 10-15 years.
I get the concern for a large drop in the market and it is the main reason why I continue to work and invest even though I could just walk away and live a very nice life. You should look at the resiliency of your current portfolio and see how it weathered the 2022 downturn. Between 12/31/2021 and 12/31/2022 my pre-tax and post-tax accounts lost between 29.2% to 44.6%. By 12/21/2023 the accounts had fully recovered and were up 14.9% although that does include two years of additional contributions buying through the dip and rise. How did your portfolio handle this period?
>I'm just doomsaying and speculating by looking at some historical huge losses like black monday or the great depression If you were long throughout 1987 and held through Black Monday, you ended the year down only 2.4%. Those who held recovered fully the following year with a healthy 7.3% return. The pain was borne by two groups: (1) the panic sellers and (2) those in the derivatives markets who were upside down when they got margin calls. It's funny, my father was a broker and options trader at EF Hutton back in 1987; I was a child then and will never forget the look on his face when he came home that day: He looked exhausted and defeated. Yet the world did not end. The Great Depression was a very different situation: 1929 might have been another 1987, but the leaders of the great nations at the time attempted radical and often contradictory moves to "fix" things. This only created an environment of uncertainty that exacerbated and prolonged the situation. One can think of that approach as the opposite of Bogleheaded, since it was exactly contrary to Jack Bogle’s advice that in the midst of market upheaval, "don't just do something, stand there." Amity Shlaes' book, *The Forgotten Man,* is a great book on that topic if you enjoy reading about such history. The 1970s stagflation and the 2000s lost decade are the closest we've come to that and, thankfully, they weren't close. Nothing since has come close to 1929-1945 and we all should hope that remains true. >I could retire early, but I would need to keep money invested to continue to live off it for years to come. What do people do when they reach this point? Would switching x% to bonds really protect my funds? You didn't say how much you already have in bonds and you seem to be doubtful about them. Let's reframe the question this way: If the prospect of volatility in your current asset allocation gives you anxiety, then is there a solution, preferable over bonds, to reduce that volatility? * Equities? Not helpful to reduce volatility. * Real estate? REITs are too correlated with equities to help. Directly owned real estate holds its value but is very illiquid and requires either "sweat equity" or the cost of a management company to maintain. * Cash? Cash helps with volatility, but the yield on cash rarely outpaces inflation except over very short periods. * Commodities, currencies, crypto, and derivatives? They offer zero internal rate of return: They're just price speculation that more resembles a weekend in Las Vegas than a genuine investment. That leaves bonds. Adding nominal bonds with BND or VGIT and inflation-indexed bonds with VTIP is a reasonable approach. If you're 100% equities right now, consider 80% equities and 10% BND 10% VTIP as food for thought. Adjust those allocations until you can sleep well at night. That all said, Morgan Housel, author of the wonderful book, *The Psychology of Money*, notably admits that he maintains a 20% cash position. He acknowledges that large a cash position doesn't make mathematical sense, but it gives him comfort and helps him avoid making behavioral errors with the rest of his portfolio. So, for him, that allocation makes a lot of sense. Perhaps something similar merits your consideration. Housel's *The Psychology of Money* and Rick Ferri's *All About Asset Allocation* are two resources I'd recommend to you.
That might be one of the best written and thought out responses I've seen on Reddit. Well done.
We do tend to push “VOO and chill” pretty hard here, but if the possibility of a 20% loss in a day (like 1987) or a 50% loss over the course of a year (like 2008-2009) would make you lose sleep, by all means reduce your risk. > Would switching x% to bonds really protect my funds? No guarantees, but historically investment-grade bonds have been less volatile than stocks and only [mildly correlated](https://www.guggenheiminvestments.com/advisor-resources/interactive-tools/asset-class-correlation-map) with the S&P. That being the case, we would expect them to [cushion](https://www.visualcapitalist.com/90-years-stock-and-bond-portfolio-performance/) some of the highs and lows.
It’s not a loss until you sell. Bonds won’t protect you. Just diversity your assets and don’t freak out when there’s a big market decline. There’s always one on the horizon. Might want to consider adding some JEPI to add some more stability to the portfolio. If you can’t handle big ups and downs, move some of your money out of the market and into a HYSA. At least they are paying 5% right now.
Yes, this is exactly why people increase their bond allocation as they approach retirement, because stability becomes more important relative to growth. Also, the standard 4% withdrawal rate is designed to protect against the worst case scenario of a crash. If you're retiring for 20+ years, you have time to survive a crash and then see your position recover. It's hard to give you more specific advice without numbers, though.
One day? Let’s take a chill pill. Lol
i think if your 20 years of gains can be erased in 1 day, your net worth is least of your concerns. There will be bigger issues to worry about. Beyond what you say, I would say have some real assets like paid off home. Then have enough money in HYSA for few years. Also you can switch your retirement portfolio to target date funds so that its adjusted automatically.
I’m in a similar position. My advisor and I have discussed putting assets into three “buckets.” The first contains enough assets for 5 years of living expenses and is parked in an HYSA. The second is for the next 5 years and is conservatively invested. The third includes the remainder and is focused on total return. The idea here is that even if the market drops, your bucket #2 + #3 will have time to recover. And you can still grow your assets without fear of not having enough to survive. More than 95% Warren Buffets assets were acquired after the age of 60.
So you’re going to have ~67% of your assets in fixed income?
The buckets are not equal. Example: $1M in assets, $50k/year in expenses. * Bucket 1: $250k in cash money. * Bucket 2: $250k in bond ladders. * Bucket 3: $500k in stocks. Personally I think 10 years of expenses in buckets 1/2 is probably too conservative. I'll be aiming more like 3 years in each.
He may have said that. We discussed it last year
I know its the extreme, but if we had an instance like the great depression, you'd have another 10 years where you'd have to pull from the market before it fully recovers.
The more likely alternative is holding everything in cash under your mattress and watching it devalue over time. Physicians have a great saying: When you hear hooves think horses, not zebras. I think the same sentiment is true here.
if the entire stock market goes to 0.......the bonds are gonna be worthless......and time you come out of the nuclear fall out shelter to fight the cannibals.....
Take some and put in a fixed immediate single premium vanilla annuity. This is literally fixed income.
Be more specific. Retiring early isn't much different than retiring in your 60s as you still only have a moderate chance of death bailing you out of bad stock returns. You still have to plan for 30+ years. While 60 years requires some more money it doesn't require that much more. That being said diversify more. If you have 30x next year's retirement spending you are in very good shape. At 40x you are safe from just about everything. Below that very bad luck is a problem. If you are there, you can start derisking some. An example of derisking (assuming tax advantaged) * 15% USA small cap value * 15% EM value * 70% intermediate bonds That portfolio returns about 1% less than stocks while being a much smoother ride. lots of negative correlations between the factors in the components. If taxable money you can do the same sort of thing with permanent life insurance or if you are close enough to 60 deferred annuities.
Low effort Post
Low effort response
Asset allocation is important. If you're staying long individual stocks consider trailing stop orders in case the market dives. Your market order goes live at that point and while price isn't guaranteed you can minimize loss. Alternatively use limit orders.
Personally, I think bonds are an important piece to diversify a person's portfolio regardless of their age, years left to retirement, and market outlook.
I would just divide my investments, move some into safer dividend index funds, bonds, HYSA, and and maybe even take some profits I mean hey the market is boiling hot right now. For perspective I’m in my mid 20s and what I would do in your situation but personally I’m obviously well risk averted as time is on my side..well should be
I have to ask: 1. What does your portfolio consist of? All equities? 2. What is your cost basis vs gains? You talk about losing what you’ve worked 20 years for but I’m guessing a significant amount is your assets is market performance, not solely contributions. Not justifying accepting a 20% loss on your current value but trying to put it into perspective. You need to have a long-term investment strategy that at least risk-adjusted market returns. It’s common tactic to transition to conservative portfolio allocation when you near retirement age but you have to try to figure out when you expect to be drawing down your retirement pot.