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Someone asked what I thought about Intercst's data showing that a portfolio with less than 100% stocks would have done better than a 100% stock porfoltion over each of the most recent 11 30-year periods. You might want to look at his chart for reference, post #127782 on the REHP message board. Good question. I am tempted to start a thread on this, but will try a meandering response here.

My first reaction is to worry that I might be fundamentally wrong. My second reaction is to worry about data mining, looking at a small sample and reducing the quality of analysis. Even expanding the sample to the 23 30-year periods from 1950+ suggests an average portfolio of 75% stocks and 25% bonds. Two common dates used to differentiate the "modern American economy", whatever that means, are 1950 and 1965 which is why I took that arbitrary date.

There have been a couple other periods when there appear to have been a cluster of 30-year periods when holding fewer stocks was good, followed by a number 30-year periods when 100% equities were better. From Intercst's chart, 30-year periods beginning in 1881-1887 and 1902-1910 and 1928-1931 look a bit similar. Still, the cluster of periods starting in 1962-1972 look darn poor for stocks relative to bonds.

Remember, one benefit of being a FIRE wannabe in accumulation mode is that bear markets offer stocks at a discount. Consistently buying through downturns, say using dollar cost averaging, would presumably give much better portfolio returns for a 100% stock portfolio than these figures. Intercst's figures represent a portfolio in pay-out mode, and he is estimating what you should be invested in and what safe withdrawal rate should be used. The 11 30-year periods from 1962-1972 all got wallopped by the nasty Bear market of the 1970s. This happened to be the period when Warren Buffet made incredible returns buying stocks other people had come to despise, e.g. bank stocks back then.

As an aside, I think the consensus on the REHP is to hold a portfolio with a mix of stocks and bonds to limit volatility. I want to say a 75% stocks / 25% bonds mix is often thought a good approach. As a FIRE wannabe, my family has been at or near 100% stocks for quite a while.

One of the many problems with stocks is the fluctuation in price. If you are smart, like my investing hero Warren Buffet, you know when a given stock is being offered at a bargain price and when you should not hold 100% equities.

I have difficulty being that smart. I understand a bunch of ways to measure how pricy stocks are, from P/E to comparisons with GDP, but do not have a good consistent benchmark that will tell me when to be in the market and when to be out of the market. I saw my dad convince himself he was smart enough to decide when to go in or out of equities and fail miserably. My family's approach to date has been to be 100% in equities, use dollar cost averaging into broad indexes, and add long term buy and hold stocks as our confidence in picking them improves. Whatever gets set aside for FIRE stays in stocks until at least 7 years before retirement. I should probably think about it some more, though.



PS: On Stetson's question, I am sorry to have been unclear. Equities just mean stocks, which can be either U.S. or International. Stocks can be held individually or through an index fund. Bonds are not equities, but debt instruments you purchase in return for a given coupon or return paid out on the I.O.U.
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