Well turns out that me suggesting that young people with long investing time horizons invest 100% in stocks sturred up a lot of activity on my blog and to be honest I never could have imagined I would have gotten so many high quality comments on this post. I’ve learned a lot in the process (I think) and I figured it would do good to sort of recap the comments from the other post and give a general idea of what my readers thought (or at least my convoluted interpretation of their thoughts).
Simple Summary of discussion
The simple 10,000 foot level summary, that I think most of the commenters agreed with were. Based on historical returns, you are more likely to get the highest returns in the long run (20-30 years) by having a portfolio of 100% stocks, but in order to achieve this you will have wild roller coster type rides of huge runups and huge decreases of your portfolio over shorter periods of times. So if you truly are in it for the long-term and won’t react/panic to huge changes in your portfolios value over the short-term and want to make the most money possible this is the way to go.
Well it’s not that simple, there are other attractive alternatives
Now it was also pointed out that some people think you can remove this volitility by putting a portion of your portfolio in bonds and still get a return that is pretty darn close to the pure stocks portfolio, but without the drastic swings. I certainly agree about the volitility part, but you are still going to be settling for a lower annualized return over the long run, which even 1% can mean huge money when compounded over 30 years. There certainly is no way (in the long run based on historical trends) that you can make more money than a 100% stock portfolio
I think one thing overlooked by myself and pointed out by some of the commenters is – eventually as you get closer to retirement you will have to switch to a higher percentage of bonds, because then your timeframe is much shorter and a huge swing to the negative could adversly affect my retirement plans (hello Ramen). Now depending upon how the market is doing at this point your life when you need to start switching to bonds could take alot of discipline on your part to sell some stocks to switch to bonds if the market is really tanking or for that matter really rising. I can see here where those lifestyle funds would come in handy because it doesn’t require any interaction on your part.
What I learned
It’s just not that simple and even if I decide to stay with 100% stocks in the short-run I maybe should start considering bonds, high dividend stocks, REIT earlier than I originally thought as the better things go for me, the closer I come to retirement, and the more I need a fixed income contingent in my portfolio for stability. However it still might be hard for me to give up returns just for the extra stability (at least in the next 15 years). I guess worst case scenario I would stay weighted heavy towards stocks and let the market deterimine when I can retire. If it goes into a major slump right before I want to retire, then I will just keep working. I have invested in myself so much (Computer Geek, MBA, etc) that I feel I have pretty good control over the types of jobs that I could hold and that if I had to put off my retirement for another 5 years because of the stock market taking a major dump I could do so and it wouldn’t necessarily be a bad thing. IE I could find a job that I really enjoyed and fit my lifestyle very well while still providing me with suitable income while I wait. However if I didn’t have the education and skills that I have and was working in a mill and stuck with one good job possibility I might be weighted a lot heavier towards bonds 😛 (Note: not dissing people that work in mills, I just feel that some career paths have less opportunities than others) Also add in the fact that my wife and I can live very frugally and enjoy doing it, it wouldn’t wreck our lives to have to wait a few years on the stock market before we got all uppity uppity about our retirement (maybe a new Escort 🙂 )