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How Much of Your Nest Egg Should Be in Stocks? All of it - NY Times

| March 18, 2016
Asset Allocation

"In theory there is no difference between theory and practice. In practice there is."   Yogi Berra

If you are retiring soon or already have, what percentage to allocate to stocks is nearly always a concern.  Recently, David A. Levine writing in The New York Times said -- "All of It."   In his article, Levine also adds a similar opinion from references Warren Buffet.  
Source: NY Times

No less an authority than Jane Bryant Quinn posted:  "The more we depend on interest-rate investments, the more likely it is that we might run out of money in our older age. It might be safer to gradually hold more money in stocks, rather than less, after we retired."  Source: Jane Bryant Quinn

And, taking a more lighthearted approach with a reference to the movie "Back To the Future," Josh Brown writes:

"Biff Could've Just Bought Stocks"  "Every dollar invested into the US stock market in 1985 would currently be worth more than 25 dollars."    Source: Reformed Broker-Biff Could've Just Bought Stocks

And on a serious ... but eminently more practical note (like Yogi above,) Josh also observed:

"I can promise you that almost no one can endure – emotionally speaking – the volatility and drawdowns that an all-equity portfolio brings to the table."  Source: Reformed Broker - Should you be 100% long stocks

Competent, experienced  and well-meaning professional advisors who follow the Fiduciary Duty might (and often do) "agree to disagree" with one another.  Thinking in depth about this topic I arrive at a counter-intuitive answer.  Maybe the smaller your nest egg, the higher percentage you need to put into stocks.  (Think Parable of the Talents.)  Source: Bible Gateway

An interesting question is... Assuming 100% in cash ... zero expenses ... zero return ... how many years of withdrawals would it take to deplete the account?  If you could live easily on a withdrawal rate of 1% ... i.e. it would take you 100 years to deplete the account ... you are essentially investing for your estate / children / grandchildren.   If you (and / or spouse) are in good health and have a 30 year time horizon, Levine quotes Morningstar in his article and says you can put it all into stocks.  In this example, I agree because living expenses are so low in comparison to the size of the portfolio.

Some of us are too young to remember actually experiencing high inflation.  But inflation protection has historically been an excellent reason to invest in stocks.  But what about the retirees whose situation is more problematical?  if you "do the math" and calculate that you'll deplete your account in 10 - 15 years, doesn't that argue for a lower percentage allocation to stocks?

Yes ... well ... maybe ... Emphasizing what Yogi said, and seconding what Josh said, let's be practical  Also ... please see this ...

Regular readers will know I'm a big fan of Guaranteed Lifetime Streams of Income.  Also see this ...   

In my professional opinion, two critical things are going on:

  1. Doing the Math is not that easy
  2. Avoiding Unforced Errors is also not that easy

If your retirement nest egg is 100% stocks ... or even a more practical 70% as Jane Bryant Quinn recommends ... and then you see a 35% loss ("drawdown" ... what a euphemism ... ) then you have Nerves of Steel to actually stay the course.  The likelihood is that you'll sell ... at the Bottom ... yikes!

Conversely, if you know your monthly expenses are $3,000 ... and you know that every month $3500 hits your account from Guaranteed Lifetime Income sources ... then ... again as Yogi might paraphrase, the practice will stay a lot closer to the theory.

Regular readers might remember that I'm also a big fan of covering your "need" expenses with Guaranteed (Joint) Lifetime Income sources.  For the "want expenses" ... have a party and be 100% stocks with that part of the "bucket;."

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