DURING MY 30s, I worked for a defense contractor. The Berlin Wall fell in November 1989 and the Soviet Union imploded just over two years later. Many at work believed that the end of the Cold War would lead Congress to reduce defense spending. Sure enough, layoffs at my company commenced soon after.
I was fortunate to avoid being laid off. I do recall, though, overhearing one coworker in his 50s who, after receiving a pink slip, lamented, “At my age, who will hire me?”
I felt sorry for the poor fellow, and decided I had to get serious about investing for my future. I didn’t want my life to fall apart if I received a pink slip in my 50s or 60s. I was saving in the company’s 401(k) plan at the time, but that was about all.
Having no investment knowledge, I thought it prudent to engage the services of a financial advisor. Without any experience, I didn’t know how to evaluate and select one. I made a choice based on an ad. I found the experience underwhelming.
During my initial meeting, I recall the advisor asking me what I thought the inflation rate would be in a few years. I confessed that I had no idea, but pulled a number out of the air nonetheless. Sometime later, it dawned on me that the advisor was probably gathering inputs for a computer program that would spit out a report he could hand me—along with a bill for his services.
I was working fulltime, so I made appointments to see him at 5 p.m. At one such meeting, the advisor cut our visit short because he had to get home to watch the kids, so his wife wouldn’t miss her guitar lesson. That’s when I decided to become a do-it-yourself investor.
To educate myself, I read John Bogle, Burton Malkiel, William Bernstein, Jonathan Clements, Charles Ellis and others. I learned that the first step to building an investment portfolio is to choose an asset allocation—the distribution of your dollars across stocks, bonds, cash and alternative investments.
Throughout my 40s and 50s, I was about 70% in stocks and 30% in bonds. With the benefit of hindsight, I should probably have had more money in the stock market. But with my investment knowledge still limited and not yet confident in my abilities, I opted to be more conservative.
Much of what I read about choosing an asset allocation centered on answering these questions: How much risk was I able to bear? How much was I willing to bear? The answers would govern how much I should allocate to stocks.
The more I thought about it, however, the more I realized that my risk tolerance was a moving target. I was risk tolerant during bull markets and risk-averse during bear markets. This uncertainty helped explain my somewhat conservative allocation.
This focus on risk tolerance was meant to prevent me from committing the cardinal sin of investing—getting unnerved and selling at a loss during a bear market. If I could avoid tinkering with my portfolio during downturns, I probably had my asset allocation about right.
Now that I’m retired, and have more investment experience, I’ve demonstrated to myself that I can leave my portfolio untouched during bear markets. My current stock-bond split is about 60-40.
Another important lesson I learned: Always look for opportunities to increase the diversification of my portfolio. It’s the best way to both reduce the probability of a large loss and increase my long-term compound return.
I also learned it’s counterproductive to add an investment with a high correlation with another investment that I already owned. Their prices will tend to move up and down together. I wanted to add uncorrelated assets—those whose prices would tend to zig when my other holdings zag.
I know my allocation today, but is that where I should stay? As a retiree, I’m always wondering if I have too much money in stocks. I could have a significant loss in a bad market. Yet, if I invest too little in stocks, I may lose ground to inflation.
At the same time, I wonder whether I’m overweight in bonds. If I have too much invested in bonds and cash, I’ll lose ground to inflation. Yet if I don’t own enough of these assets, would I have to sell stocks to meet unexpected expenses, such as replacing the roof?
None of these questions has a clear, definitive answer. Any decision involves a tradeoff between risk and return. That brings me to a big risk: future health care costs.
Neither my wife nor I own a long-term-care insurance policy. We’re both in our mid-70s. We feel we need the growth typically offered by stocks to self-insure against the risk that one or both of us will eventually need nursing care. That’s why, even at this late stage, I’ve decided to put a bit more money into growth investments.
Even if my current portfolio gives us the growth we need, and it fits within my risk tolerance, still another question arises. Should I leave things alone as economic conditions change? International stocks, for instance, have underperformed the S&P 500 in eight out of the past 10 years. Could international shares be poised to outperform U.S. stocks over the next decade?
If I was still working and saving for retirement, I might increase my international stock exposure by a few percentage points. Is this a prudent move in retirement, however, when I have less time to recover from a setback?
There’s no perfect answer, and yet I need to make a decision, even if the decision is to sit tight. One influence on me is Bill Bernstein’s admonition, “When you’ve won the game, stop playing with the money you really need.”
Have I won the game? With ever-rising health care costs, with the never-ending battle against inflation, and with our dynamic domestic and global economies, I’m not sure I’ve won—or ever will.
Now retired, Philip Stein was a public health microbiologist and later a computer programmer in the aerospace industry. He maintains that he’s worked with bugs, in one form or another, his entire career. Phil and his wife Jeanne live in Las Vegas. His previous articles were Skill or Luck and Saved by Compounding.
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Congrats on making it as far as you have and sticking with your 60/40. You didn’t mention whether or not you have a cash reserve established to meet at least your fixed costs for three years or so if needed to get through a bear market. If you don’t have that already, you might consider setting aside that amount in a high-yield savings account. You can remove it from your AA calculation so it doesn’t skew your bond portfolio toward too much cash.
I use our reserve for bill paying and include my safe withdrawal amount for the current year in the 3 years of reserve. The goal is to refresh the reserve at least annually by selling off stocks and bonds and moving the proceeds into the cash reserve.
The other thing that you might consider is reading up on Prime Harvesting. Michael McClung addresses this in his book, Living Off Your Money, as do other personal finance writers.
Good luck with it all – enjoy the journey!
The investment conundrum posed by the author has taken up residence in my head over recent years. My gut sours when markets decline, sweetens when markets rise, and sours again when they go stratospheric. My solution is a crude sort of visceral barometer. I hold enough equities to feel good when they bump up yet still sense a bit of regret that I don’t own more. If equities slide down I feel good that my lightweight risk allocation resets the game board for another round of play. I don’t sell equities but typically buy more when they are cheap(er).
My long time in the markets taught me that the less you trade the better the result, except for yearly rebalancing. For most the 3Fund Boglehead Portfolio will beat 90% of your peers
Kenneth, I also regard trading less as better for your financial health. I can’t recall any instance in the past where tinkering with my portfolio led to a significant improvement. Most times, I shot myself in the foot and made things worse.
I regard the Boglehead Three-Fund Portfolio as a standard by which to compare other portfolios. If your portfolio differs, I think it would be important to understand why it should either perform better or be a better fit for your individual circumstances.
Jonathan appears to have settled on a simpler two-fund portfolio consisting of a world stock market index fund and a short-term bond fund.
Getting the confidence to be disciplined during a bear market is what makes the difference. Having enough cash equivalent /short-term government bond assets in your portfolio allows you to leave your stocks alone to recover from the bear mauling.
Thank you for sharing your life journey.
No doubt your first paragraph was The international Industrial Defense Complexes employees conventional position in 89’s Berlin Wall crisis, and its aftermath. Many employees, then unaware of many opportunities arising in most crisis’s, false flaged or not. I was luckily employed in a needs level sector, food or fuel.
I might be too optimistic in my limited health micro-biologist knowledge I’ve developed over the last decade. However, I believe the multiple regulatory environments, policies, regulations, and guidelines for the USAs 50 state harmonic operation is an ever changing environment, more so today than ever.
Theres much to follow in the futures micro-biological health arena. Close to that of A.I and automation in general. I’ve two associates that have retired from GM in its recent turmoil. I recall two of their mantras.
“As goes GM, so goes the country.” That might have been an inside GM employees favorite reply when things looked bleak to them. The seconds one refers to your computer micro-biologist/aero-space insight.
Dr. Steven Greers recent congressional testimony.
“We are either alone in the world as we know it, or we are not”. Both considerations are as another had commented in another circumstance, both are unknown, unknowns.
This just took place, June9-12th/2023- https://www.youtube.com/watch?v=LORQBnFHWy8
Thanks Philip for this article. Your comment about the part of my portfolio to hold in international stocks is something I have been thinking about a lot lately.
Adam’s Grossman’s HD recent article Not Crazy https://humbledollar.com/2023/05/not-crazy/ contains many of the arguments for me to increase my international exposure stock exposure but my home country bias seems to be the factor that has influenced me to not yet take action.
I completely agree with your closing line I’m not sure I’ve won—or ever will.
William, during my working years I would probably have given serious thought to increasing my international exposure a bit. I tend to be a conservative investor, so I would have found it attractive to invest in an asset class that has underperformed for the past few years
It’s doing so in retirement that gives me pause. While I believe in regression to the mean, I don’t know how long that might take, and I wonder how long I can afford to underperform.
One other issue I struggle with: You are likely to get the most diversification benefit from international investing with small cap stocks. The argument, as I understand it, is that the performance of foreign small cap stocks is more dependent on local conditions and is less affected by the U.S. economy.
But small cap stocks are also riskier. Is this type of investment appropriate for a retiree in his 70s? I don’t have a good answer.
Thank you for your additional thoughts. I am 72 and stopped active employment last year due to family health issues so I am currently in retirement.
Not knowing the unknowable makes it hard for me to judge what is financially conservative for us when thinking about short term vs. long term and thinking about the impact of future inflation. Stocks still seem to me to be the best long term inflation hedge and opportunity for long term growth.
I worry about the impact of US population aging relative to the world population and how our government will service the massive US public debt we have accumulated and the public deficits we continue to incur. I am certain I am not alone in that worry.
The foreign portion of total world equity market capitalization is currently approximately 40% of the total world market of equities. The suggestion of Adam Grossman to have 20% foreign equities is half right and half wrong and where I think I am heading on my equity investments. I expect that will mostly occur for us as I make future Roth conversions over my life expectancy.
For bonds I am all US based short term with the majority in US Treasuries & I bonds. My thinking is to match the source of currency with where I will actually spend it to avoid currency & market risk. I currently and mostly use I bonds & US Treasury bills outside my retirement accounts, and I am considering TIPS or a TIPS index fund for a portion of my future bond/cash holding inside retirement accounts.
I have no pension but have a sufficient social security benefit that I claimed at age 70 on my work record that meets our current expense needs. I will likely change my investments when/if social security depletes their reserve fund if our social security benefits have substantial reductions or if our health requires us to move out of our home.
At age 73 a CFP told me not to buy LTC insurance. My path has been partial Roth Conver fund any needed LTC. I was told 53% of LTC is home health care/aides. Nick Murray in his book Simple Wealth talks of a 30yr retirement and heavily invested in stocks. To avoid SORR it’s a good idea to have at least 5yrs of fixed income to cover expenses so you do not need to sell equities. The basic ? nearing retirement is can one weather a 50% equity loss and still maintain lifestyle. It has happened twice in this century and will happen agin in most of our lifetimes
PS-the mentioned book is a must read
Philip, thanks for this article. One thing in particular that struck me was recalling Bernstein’s advice to stop playing when we’ve won the game, but then questioning whether we’ve really won.
If we really have, then all will be well when we stop playing by leaning conservative in our allocation. But if we only think we have, and lean too conservative, we may not know we were wrong until much later, when it’s too late to replace the growth we could have had.
Michael, we agree that It’s easy to say “If you’ve won the game…” Concluding that you’ve won is the hard part.
Even if you’re confident that you’ve won the game today, how confident are you that you will remain victorious in the years ahead? Considering the uncertainty surrounding future tax policy, inflation, health care costs, and the state of the U.S. and global economies, I personally find it hard to be confident that I’ve won. Since I’m not mega-wealthy, I’ll have to deal with an uncertain future as best I can.
Good article, Phillip. I tend to cycle between financial peace and financial questioning. My sleep is harmed, but not much else because I tend to do nothing, or do something slowly.
There were times in the past when I’d tinker with my portfolio after reading something or hearing an investment tip. I don’t recall that tinkering ever making any significant improvement.
So, like you, I tend to do little if anything to my portfolio. I fondly recall John Bogle’s comment: Don’t just do something, stand there.
Well said Edmund. If truth be told, all of us probably go thru those cycles regardless of wealth status.
Between “financial peace and financial questioning.” I know that place. It doesn’t harm my sleep, but no doubt wastes time and brain cells.