I’m mostly retired and spent this year worrying about how expensive the US stock market has become:
CAPE has gone from 32 to over 38 this year.
The S&P 500’s TTM PE is now at 31.
I started the year with about 40% equities but kept second-guessing myself, shifting into bonds and back again. Last week, I decided I needed a clearer strategy. I revised my asset allocation to have different “risk-on,” “neutral,” and “risk-off” weightings for each asset class and assigned specific accounts to handle them.
Now I’ve reduced my equity exposure to under 20% and moved the rest into various bond ETFs. I feel a lot more at ease with this setup.
What have you done to reduce your risk or manage stress about your investments?
Unless your net worth is small, that’s an incredibly conservative portfolio. I stick to index funds and keep about five years’ worth of expenses in fixed income. It helps me sleep better at night.
Reese said:
Unless your net worth is small, that’s an incredibly conservative portfolio. I stick to index funds and keep about five years’ worth of expenses in fixed income. It helps me sleep better at night.
Once you’ve got 50 years of expenses saved, the details don’t matter much. You’ll probably be fine doing whatever feels best.
Reese said:
Unless your net worth is small, that’s an incredibly conservative portfolio. I stick to index funds and keep about five years’ worth of expenses in fixed income. It helps me sleep better at night.
Bonds are riskier in the long term because they underperform equities. But if you’re retired and have enough assets to generate income, it makes sense. I’m retired too and only have 7% in equities. The rest is in alternatives and cash.
Reese said:
Unless your net worth is small, that’s an incredibly conservative portfolio. I stick to index funds and keep about five years’ worth of expenses in fixed income. It helps me sleep better at night.
I look at the 50% drop from 1999 to 2002 and think, “I can’t handle that.” It took almost a decade to recover. If my portfolio treads water for that long, I’d be miserable.
@Oli
You’re thinking about historical returns the wrong way. Even during a crash, you don’t liquidate your whole portfolio. With 20% in safe assets, you could ride out a downturn without selling equities at a loss.
@Oli
Ignore the advice to wait out crashes. It’s easy to say when you’re young, but at 60+, a big loss can ruin your retirement. You’re doing the right thing by prioritizing security over chasing higher returns.
@Oli
Even in the worst decade, a 100% equities portfolio would only underperform by 20% compared to a conservative one. Over the next decade, equities would likely outperform bonds by a significant margin.
@Oli
You wouldn’t have to sell stocks during a downturn if you keep bonds for emergencies. You could even use bonds to buy more equities at lower prices.
Reese said:
Unless your net worth is small, that’s an incredibly conservative portfolio. I stick to index funds and keep about five years’ worth of expenses in fixed income. It helps me sleep better at night.
If you only have five years of fixed income, are you constantly replenishing it by rebalancing? Do you think that’s better than keeping a larger chunk in fixed income?
@Dezi
Yes, I rebalance as needed. Keeping too much in fixed income limits growth potential, especially since fixed income mostly keeps up with inflation.
Reducing equity exposure makes sense with the market so high, but don’t forget about inflation risk. Bonds barely keep up with inflation in normal years and lose value in high-inflation periods. Equities are one of the best hedges against inflation because companies can adjust prices.
I’m at 10% equity exposure, with most of my portfolio in bonds, private credit, and a CHF-to-USD carry trade. It’s a conservative setup, but it works for me.
Instead of immunizing my portfolio, I’ve focused on creating a stable passive income stream in retirement. I’ve put 90% of my assets into cash-flowing investments and only 7% into equities.
I’m still far from retirement, so I’m 100% in equities. However, I’ve diversified internationally, focusing on undervalued blue-chip companies in regions like China and Brazil.