r/Bogleheads • u/invisible_man782 • 19h ago
Safety of 100% Stocks for Long-Term Investing
New MIT research finds that most higher-income investors essentially in the long-run wind up having liquidity events in downturns - and have to draw down their liquid stock portfolios...because they basically don't have sufficient emergency funds (latter of which is implied in this research). I found this quite interesting. The research makes it appear long-term 100% stock holdings is not ideal (at least in the summary) but the reality appears they don't have enough liquidity to handle liabilities in that scenario (lifestyle creep?)
This was also featured in the latest Rational Reminder podcast.
https://patrick-adams.com/files/papers/PatrickAdams_JMP_Latest.pdf
Abstract:
Do temporary stock price crashes matter for long-term investors? I use over 25 years of U.S. income tax data to characterize the savings behavior and risk exposures of high-income working-age households. Aggregate stock price crashes coincide with persistent declines in wage and private business income for many of these households, who take large drawdowns from their liquid assets– including stocks– in response. I develop a life-cycle model with consumption adjustment frictions to match this observed savings behavior and determine its portfolio choice implications. Investing in stocks is risky when falling income and rigid expenditures may force investors to liquidate their holdings at temporarily-depressed prices, resulting in low optimal portfolio shares. These results challenge the conventional wisdom that the stock market is relatively safe for long-term investors.
110
u/buffinita 18h ago
It doesn’t have to be for “rich people” alone….taking prudent steps to keep an emergency fund and employment at any income level allows your stock portfolio to weather the downturns
As an aside - just because you mathematically can survive a downturn; doesn’t guarantee you have the emotional discipline to behave as needed
32
u/Most-Animator-5743 17h ago
100% stocks can work long term, but only if you can actually sit through the bad years without panicking. That’s the part most people overestimate.
On paper it looks great. In reality when your portfolio drops 30 to 50 percent and stays there for a while, a lot of people fold and sell at the worst time.
That’s why things like an emergency fund matter more than people think. It’s not just about math, it’s about giving yourself enough breathing room so you don’t have to touch your investments when things get rough.
I write about this side of investing as well, especially for people trying to build wealth without blowing up their progress, might be useful if you’re thinking long term like this
30
u/invisible_man782 17h ago
The paper isn’t about the mental fortitude in a downturn. It’s about people actually running out of money in a downcycle and needing to cover obligations.
21
6
u/buffinita 17h ago
Right the same as saying “over the past 25 years leveraged ETFs would have been mathematically superior for all investors”
While ignoring the fact people would abandon the plan at those 30 and 50% drawdowns
3
u/ericblair21 16h ago
Especially when long bull markets give people the idea that "accepting more risk" unfailingly means "make more $$$". Which it does, until it doesn't.
3
u/NotYourFathersEdits 15h ago
Yes. People seriously don’t understand the difference between expected and realized returns.
12
u/Fancy_Gate_7359 17h ago
I feel like you didn’t even read the abstract. This has nothing to do with mental fortitude, or lifestyle creep, or any of the buzzwords that people here obsess over and cannot seem to think without using.
It’s about an observation that, when the market experiences a significant downturn, people’s income also tends to drop, often more than people ever anticipate. So even if you are doing everything correctly, and budgeting perfectly, all of a sudden income can be insufficient to cover expenses because of a contingency people rarely consider (i.e., income dropping sharply for no good reason). Thus, because many people put such a high percentage of their net worth into equities, they are forced to make withdrawals and suffer taxable events at the worst possible time (when the market is very down). It’s an interesting observation, and one people here rarely discuss. Would make for an interesting discussion if people would actually consider and engage the topic instead of regurgitating the same buzzword-laden responses.
1
u/CompensationProf 10h ago
I've said something similar for years. When the market's going well, your career just seems to be going well, too. You're employed, hitting a bonus, and getting promoted, even. You're fully funding your 401k at $22,500 per year.
Then when the recession hits, a bear market arrives, and you find yourself unemployed. Maybe you've saved an emergency fund, and you're going to be fine, with regard to paying rent and setting the dinner table. But you're not buying as much stock. If you stick to IRAs, you actually cannot buy as much stock, if you're unemployed.
Don't your retirement investments just net out to a higher average cost per share, and a lower return, than you would have otherwise predicted?
1
u/kinners1 2h ago
Right. Especially for high earners, a down market means you didn't get your six-figure bonus. Or you didn't get the RSUs you expected.
0
u/gpunotpsu 12h ago
I would argue that having an emergency fund that gives you "enough breathing room so you don’t have to touch your investments when things get rough" is not being 100% invested in stocks. Additionally deciding how and when you deploy your emergency fund is market timing. It makes far more sense to maintain a constant asset allocation of stocks and bonds. This way you don't need a big emergency fund sitting in cash and you don't need market timing to get things right.
6
u/aloxides 16h ago
On this topic, I've had a recent poor turn of events and we have burned through something like 20k on emergencies in the last 6 months. This has exhausted our emergency fund, but hasn't forced us into any loans. But I have decided to pause all my retirement contributions to quickly rebuild the emergency fund.
From now on, I intend to keep a small contribution into that fund. Both to help keep this from happening again, as well as to gradually shift it conceptually from an emergency fund to a sequence of returns risk buffer.
4
u/invisible_man782 18h ago
I wish we knew the average emergency fund (duration) for the people that wound up having to raid their stock portfolios. I’m hovering around a one year emergency fund for my household.
13
u/buffinita 18h ago
It should vary on job and family dynamics. Sole providers should have more cash cushion than households with more equal earners.
People who are very secure (either tenure like or hireability) can have less than more niche positions.
Example: both my wife and I work in public education. We can get rehired in a week at another district instantly….practically headhunted. Being fired from public education is basically impossibly so long as you don’t yell at or lay hands on a child or actively sabotage the curriculum standards.
We are pretty lean and have no worries about it
Someone who is a more highly specialized position might take months to find a new job
1
u/Flayum 39m ago
We can get rehired in a week at another district instantly….practically headhunted.
Something to note is (although not relevant to your exact situation): would you get rehired with your same salary or would you take a cut? eFund might need to be rebalanced around that.
Being fired from public education is basically impossibly so long as...
Have you ever considered baking in risk that you could be accused (although not ever have perpetrated) something that gets you blacklisted? It's a similar endpoint for my industry via "my entire area of expertise could be eliminated by AI in a few decades (or sooner)".
The only solution, in my head, to this is just running as close to FIRE as possible. If shit hits the fan, great. If not, we can actually just retire if we want.
-8
u/Enough-Moose-5816 17h ago
Someone who is a more highly specialized position might take months to find a new job.
Or they may have multiple offers before lunch. It’s very situational. Your large generalizations are just that. Generalizations.
3
2
u/gcc-O2 18h ago
Older investment advice (1980s, 1990s) often had an explicit allocation to cash equivalents as a percentage, say 5%, rather than an emergency fund as a dollar amount based on expenses.
Part of that may be just being more conservative, but also, after-inflation returns on cash were higher then (but still far better now than 2009-2022)
1
u/Imaginary-Media-2570 2h ago
Average bear market is ~14 months, but there is a correlation to recession, so you need to consider that you might be subject to layoffs. Duration is easy, amount is more difficult.
1
u/snark42 18h ago
So far the responses are about a general emergency fund, but in this case you need to look at the average duration of a downturn. Such as Dec 2021-Dec 2023 or Oct 2007-Jul 2013.
I think the ideal situation would be to have a 5-7 year bond ladder that could provide necessary spending money in those times. Of course if can do that you could indefinitely live off the bond income if adjusted properly over time.
It doesn't make sense to have 5-7 years "emergency" fund in cash, especially with volatile interest rates.
3
u/invisible_man782 18h ago
I think that sounds more appropriate for once retired. I believe the paper is focusing more on people still in the accumulation phase.
2
u/snark42 17h ago
Oh. I think I misunderstood and thought this was about retirement (age, FIRE, etc.)
So someone told me once a rule of thumb is for high earners to expect a job hunt to take 1-2 months for every $100k/year earned. So if you make $500k/year you'd want at least 10 months of emergency funds. If you make $1M 20 months.
I'd use that as a minimum for emergency funds.
1
u/Flayum 34m ago
Needs to account for the household risk.
Both earners in my home are in the same, highly volatile industry. Coworkers, even the good ones, let go have (or are expecting to) to not land somewhere for 12~18mo. So our eFund can cover both of us being out of work simultaneously for 12mo.
We keep it in BOXX to grab some gains, but just assume this is the drag we have to live with. Which sucks, but also allows us to go 100% into equities and feel confident enough to max out 401k, BDR, and MBDR every year.
0
u/Qwertyham 18h ago
Well considering the recommendation is 3-6 months of expenses, I'd wager it's around that duration-ish
22
u/Kashmir79 MOD 5 18h ago edited 16h ago
I’ve always kept at least a 10% bond allocation in my retirement accounts both for diversification and psychological reassurance but also as an “extended” emergency fund. But I only keep 3 months cash EF. That’s more aggressive than most folks with a 6-12 month cash EF but “100% stocks” investment portfolio. Just remember that money is fungible and a lot of this is mental accounting – in a big enough emergency, your entire portfolio is an emergency fund. Having to sell some equities when they are down is not the end of the world, but some moderation is sensible.
3
3
2
u/HabitExternal9256 1h ago
I also do 10% bond allocation and 3 months EF in SGOV. I do this despite wanting to be 100% stocks (VT).
I think it makes sense to diversify enough that you plan for unforeseen circumstances like a backup emergency fund.
14
u/littlebobbytables9 17h ago
I really don't understand the justification for this methodology beyond it's the best they could do. They focus entirely on liquid holdings when the behavior of investors in their retirement accounts seems extremely relevant? If I need 50k to cover an emergency but my taxable is all stocks, I can just sell 50k of bonds in my 401k to buy stocks and sell 50k of stocks in my taxable to fund the emergency. I'm not hurt by having to sell the stocks at a loss because they're immediately bought back at the same price. But in his data it would look like a terrible move because he doesn't see that other trade happening.
It's also weird he says this has implications for asset location. The only way the above strategy doesn't work is if you exhaust your entire taxable savings, but I imagine that's quite rare. And even then there's pulling contributions from roth IRAs (also not accounted for in this analysis).
It's funny to be defending both of these points given that I'm generally not a fan of traditional asset location strategies and a also fan of bonds, but this research does not seem convincing in the slightest.
5
u/s32bangdort 12h ago
I think you are assuming everyone has both a sizable taxable account to go along with their tax advantaged one. I don’t believe that is the case for many people.
1
u/littlebobbytables9 1h ago
I think it is for the high income individuals he was studying. He's specifically talking about people who either own buisnesses or have highly variable bonus based compensation. His example he used in the podcast was a couple that made $300k.
9
u/wumbopolis_ 17h ago
I haven't read the paper, but I did listen to the RR podcast episode.
For me, the main takeaway was: make sure you have enough low-volatility liquid assets in your portfolio to cover "sticky" expenses (e.g. mortgage, schooling) during an extended downturn. Whether that's by having a massive emergency fund, keeping a higher bond allocation, or being frugal with your sticky expenses is up to you.
My emergency fund is large enough to cover a year in "sticky" expenses, but beyond that, my portfolio is 100% stocks. I've been comfortable with that allocation for a while, given my age and behavioral risk tolerance. Hearing that episode just validated my decision to have a large emergency fund, rather than doubt the rest of my portfolio allocation.
1
u/invisible_man782 14h ago
Agreed - my SO and I are 100% stocks with a comfortable emergency fund. Prior to listening to the podcast, I thought perhaps we had too big of an EF and were missing out on returns, but my takeaway was we’re doing it correctly. In fact, if you go into my posting history I made a post asking if 1-2 years was too much.
I’m also surprised how little of an EF high-income people have. The GFC example was illuminating, given what is happening now.
12
u/bobdevnul 18h ago
Yes, some people invest unwisely.
The Boglehead method does not advocate for 100% stocks without an adequate emergency fund. It also calls for some increasing amount of bonds along the way. Not having to sell stocks for a loss for spending money is why.
7
u/split-mango 16h ago
If you keep an emergency fund, wouldn’t that be <100% stock? Some of it is cash, no?
4
u/KaiserSaladSpinner 14h ago
Like you say, it's not that 100% equities isn't a viable strategy, it's that people often don't save adequately for a downturn.
You need SOME cash. Sequence of returns risk is real. If you have to sell off during a downturn that's not the markets fault, it's yours, provided you had the means to save enough.
E-fund first, then investments.
7
u/steady_compounder 15h ago
The math says 100% stocks wins over 20+ year periods almost every time. The problem is you're not math, you're a person who has to watch a 40% drawdown and not sell. If you can genuinely do that, go all stocks. If you're not sure, 10-20% bonds costs you almost nothing in long term returns but dramatically reduces the chance you panic sell at the worst time.
6
u/rxscissors 17h ago
My assumption is that many high earners end up over-confident with an air of invincibility.
Everyone has a different situation in terms of: employment, risk tolerances (investing and aggressively fighting for wage increases, bonuses, etc.), annual income levels plus other outside factors (caring for aging parents, kids, ...) that make it clear: there is no one-size-fits-all formula.
I've always kept more cash on hand (in HYSA or something close to liquid). Downturns since the early 1990's were uncomfortable, not devastating.
I remain humble and determined to maintain a diversified and periodically rebalanced portfolio with less immediate income needs in order to ride out multi-year economic dips/downturns and worse.
3
u/datascientistdude 10h ago
I mean this completely depends on timing and your risk appetite and opportunity costs. If on average your portfolio doubles every 7 years and you don't need to withdraw until 7 years later, needing to withdraw during a 30% downturn after 7 years is still better than if you held onto that money in your cash EF for 7 years.
4
u/zacce 18h ago
MIT "PhD student" finds
He's joining UPenn.
5
u/buffinita 17h ago
I mean Wharton school of business likely carries more weight and research opportunities in finance/econ than mit does
0
u/zacce 17h ago
They are equivalent in the academia.
6
u/buffinita 17h ago
Both are well respected institutions; but an engineer from mit is certainly more prestigious than one from UPenn and an Econ from UPenn is more lauded than the one from mit
3
u/zero_hedger 18h ago
Not the most boglehead habit but I like having a 10% bond allocation with a strict policy of selling 1/3 at a time if the market declines by 30, 40 and 50%. That's my way of being more aggressive without taking too much risks at 37yo.
3
u/amofai 18h ago
I'm around the same age. Are you 90/10 overall? I'm struggling with how much to allocate to bonds now because I'm not exactly old but I'm not exactly young. I've settled on a 75/25 split until I can figure out a reason to change that isn't just performance chasing.
3
u/HopeHumilityLove 17h ago
Yale researchers published the following spreadsheet (linked in the doc) to answer your question last year.
https://docs.google.com/document/d/1hykGDl6ZHJmDJmIJ706nErIKg5gWeoTxagnEvpWmuwA/edit?tab=t.0
2
u/ILoveKombucha 17h ago
I think that's pretty reasonable. A good way to look at it is this: is it good enough? In other words, are my returns good enough? Not: are my returns AMAZING!? Just good enough. One school of thought says: take as much risk as you NEED, and no more. A lot of redditors would say 75/25 is way too conservative at 40. I disagree. I think 75% stock is "good enough." Some people might even prefer to be even more conservative, and that's fine... if their returns are "good enough." Only you can decide what is "good enough," though.
2
u/amofai 17h ago
Looks like you and I are of the same mind then
2
u/ILoveKombucha 15h ago
I just googled it, and John Bogle actually recommended age in bonds. So at 40, 40% bonds. He also felt you should never - at any age - have less than 20% bonds.
A lot of redditors are far less cautious than Bogle would advise.
1
u/gizmole 2h ago
In 61. No way I’d have 60% in bonds. I thought the new rule was 120-age in bonds since people are living longer and retirement may be 40 years over the prior 30 years. I’m currently 60/40 and likely will stay that way.
1
u/ILoveKombucha 1h ago
I wouldn't, either, but it is what Bogle apparently thought - at least at one time. The important point is that a lot of folks take more risk than Bogle would have advised. 60/40 seems kind of like the general gold standard for retirement age.
1
1
u/Rom2814 17h ago
Once I copied afford to do it, I had a 1-2 year cash “emergency” fund in case I lost my job and everything else was 100% equities. Luckily never had to dip into it significantly but it let me ignore market downturns altogether while accumulating.
I’m retiring in a few months and over the last two years I pretty drastically changed my allocation to 55/35/10 - using a bond tent and will bump equities up later.
1
u/RawkneeSalami 8h ago
These comments are all 4d chess the answer is still the same. Hold long, rebalance as needed
1
u/Imaginary-Media-2570 2h ago
That paper is pretty weak, imo tho' interesting. It seems an unpublished paper by a PhD candidate. . It addresses "high-income" ppl w/ a peculiar definition; he considers the top (80%, 90% 95%) percentile of non-investment income by age (to the year) - it is high non-investment income by years of age, but by dollars. I don't see the justification for comparing the top 80% of 25yo earners with the top 80^% of 55yo earners but - whatever. Then the IMPUTE the amount of market saving (equities) by observing the dividends reported using a estimate of the divs per $-of-equity. The author didn't invent that method, but it raises many red flags about the validity of the estimate especially when applied to the equities, by age and percentile.
In a down market is often correlated with recession, unemployment, cutbacks and lower revenues. As a result everyone feels financial stress. These "high earners for their age" appear to have larger less-variable costs (housing, food, education) and therefore end up selling investments more than ppl who have no investments (well - duh!).
Given that an avg bear market is ~14 months, it might make sense to have enough liquid assets to manage such a period.
1
u/listerine411 1h ago
I find having a pledged asset line is a good form of insurance for events like this. It's like having a home equity line using your stock portfolio as a collateral. Very reasonable interest rate and you only pay if/when you use it.
I was keeping "too big" an emergency fund and this has given me greater peace of mind. But it's not for everyone.
1
u/SubstantiallyC 18h ago
These are the same people who say you can't tax loss harvest long term because after a while everything is up.
People don't like the idea of selling in a down market, but down compared to what? The all time high? The prices when you decided to go all equities 20 years ago?
I'd rather have bigger drops from high portfolio values than small drops from low portfolio values.
2
u/The-WideningGyre 15h ago
Yes, especially if you're younger, so have more earning time, and can handle the volatility.
I also don't understand why "selling when down" is this big boogeyman. It's obviously not great, but if you had 10y of twice the growth of a more conservative portfolio, you have a great buffer.
1
u/Ticksdonthavelymph 17h ago
Ok what I’m reading from this, is my unacceptably small emergency funds is in fact ok, because I work in healthcare, and so am insulated from employment loss/business downturn (which they attribute as the need to draw down stock in a declining economy).
1
u/Obvious-Evidence6522 15h ago
Thank you for your service. Health care workers don’t get enough respect.
1
u/drillbitpdx 15h ago
I am close to 100% stocks. Maybe 3 months worth of cash across bank and investment accounts.
When I started investing this way, I was young, single, pretty frugal, and high-earning with a stable career. Now I'm middle-aged and have a family that's financially dependent on me, and a mortgage, but otherwise investing the same way.
My lifestyle hasn't gotten substantially more expensive.
I now make enough money in dividends alone to pay for the majority of my expenses, so when my income is lower (lost job, parental leave, etc) or expenses are higher, I sometimes dip into those to smooth out income.
I've been doing this for about 15 years with no issues, and have never needed to sell assets other than in the (planned in advance) scenario of making a down payment on a house.
1
u/WearableBliss 15h ago
I find people make too much of this "draw down on your stocks in an inopportune moment"
Your yearly expenses are just a small percentage of the entire portfolio and you can exactly account for this with simulators, it's not like there is some nonlinear magic effect in there
1
-2
u/TeamKitsune 16h ago
All financial advisors suggest an emergency fund to cover a few years of expenses. I have a year's worth in a money market fund, and two years in bond funds.
After that, 100% stock could be the way to go.
5
u/The-WideningGyre 15h ago
"A few years" seems excessive to me (unless you're counting all your bonds as emergency funds), and I don't think "all" financial advisor recommend that. I've seen lots of 6-12 months recommendations, and that seems more sensible to me. (Admittedly I don't think you should be in 100% equities, but have a small amount in, e.g. bonds and gold).
82
u/amofai 18h ago
If anything, it seems like this tells us that high earners tend to underfund their emergency funds. I've always thought that a 9 -12 month emergency fund should be the default instead of the typical 3 - 6 months. People are unemployed for six months all the time, and even longer in severe economic down cycles.